Everest Re Group Annual Report 2017

Plain-text annual report

249315 REA Holdings Cover Spreads.qxp 27/04/2018 12:55 Page 1 R.E.A. HOLDINGS PLC R.E.A. HOLDINGS PLC . R E A . . i l H o d n g s p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 7 Annual Report and Accounts 2017 R.E.A. Holdings plc First Floor 32-36 Great Portland Street London W1W 8QX www.rea.co.uk Registered number 00671099 (England and Wales) 249315 REA Holdings Cover Spreads.qxp 27/04/2018 12:55 Page 2 R.E.A. Holdings plc (“REA”) is a UK company of which the shares are admitted to the Ofﬁcial List and to trading on the main market of the London Stock Exchange. The REA group is principally engaged in the cultivation of oil palms in the province of East Kalimantan in Indonesia and in the production and sale of crude palm oil and crude palm kernel oil. Sterilising cages Steam turbine This report has been managed by Perivan Financial Limited. (249315) Using an environmental management system that complies with ISO 14001. 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Through Natural Capital Partners, offsetting these emissions by supporting global emission reduction projects that support low carbon sustainable development. 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 01 Contents Overview Key statistics Highlights Ofﬁcers and advisers Maps Chairman’s statement Strategic report Introduction and strategic environment Agricultural operations Stone and coal operations Sustainability Finance Risks and uncertainties Governance Board of directors Directors’ report Corporate governance report Audit committee report Directors’ remuneration report Directors’ responsibilities Auditor’s report Group ﬁnancial statements Income statement Balance sheet Statement of comprehensive income Statement of changes in equity Cash ﬂow statement Accounting policies Notes Company ﬁnancial statements Balance sheet Statement of changes in equity Cash ﬂow statement Accounting policies Notes Notice of annual general meeting 2 2 3 4 5 6 8 8 14 20 22 30 36 42 42 43 50 54 58 67 68 76 76 77 78 78 79 80 86 110 110 111 112 113 114 124 Currency References to “dollars” and “$” are to the lawful currency of the United States of America. R.E.A. Holdings plc Annual Report and Accounts 2017 01 O v e r v i e w S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 02 Overview Key statistics 2017 2016 2015 2014 2013 Results ($’000) Revenue 100,241 79,265 90,515 125,865 110,547 Earnings before interest, tax, depreciation and amortisation 20,051 15,933 15,123 38,797 30,269 (Loss) / proﬁt before tax (21,862) (9,289) (12,245) 23,744 25,216 (Loss) / proﬁt for the year (24,901) (11,308) (12,931) 21,981 12,672 (Loss) / proﬁt attributable to ordinary shareholders (27,408) (17,800) (20,912) 14,153 5,457 Cash generated by operations 45,816 25,371 37,286 33,053 19,358 Returns per ordinary share (Loss) / earnings (US cents) (67.0) (48.2) (59.0) 40.3 15.8 Dividend (pence) – – – 7.75 7.25 Land areas (hectares) Mature oil palm 34,076 31,521 29,367 28,275 27,102 Immature oil palm 10,018 11,325 7,730 6,339 6,960 Planted areas 44,094 42,846 37,097 34,614 34,062 Infrastructure and undeveloped 32,033 27,738 33,487 35,970 36,522 Fully titled 76,127 70,584 70,584 70,584 70,584 Subject to completion of title 34,347 37,631 37,631 37,631 30,043 Total 110,474 108,215 108,215 108,215 100,627 FFB Harvested (tonnes) Group 530,565 468,371 600,741 631,728 578,785 Third party 114,005 98,052 138,657 149,002 99,348 Total 644,570 566,423 739,398 780,730 678,133 Production (tonnes) Total FFB processed 630,600 560,957 728,871 774,420 677,389 CPO 143,916 127,697 161,844 169,371 147,649 Palm kernels 29,122 26,371 33,877 35,812 30,741 CPKO 11,052 9,840 12,557 12,610 11,393 CPO extraction rate * 22.8% 22.8% 22.2% 21.9% 21.8% Yields (tonnes per mature hectare) FFB 15.6 14.9 20.5 22.3 21.4 CPO 3.6 3.4 4.5 4.9 4.6 CPKO 0.3 0.3 0.3 0.4 0.4 Average exchange rates Indonesian rupiah to US dollar 13,400 13,369 13,377 11,908 10,494 US dollar to sterling 1.29 1.36 1.53 1.65 1.57 * The group cannot separately determine extraction rates for its own FFB and for third party FFB. CPO extraction rate and CPO and CPKO yields are therefore calculated applying uniform extraction rates across all FFB processed. 02 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 03 Overview Highlights Overview Sale of subsidiary • Production and revenue saw a progressive improvement in 2017, which is continuing into 2018 • Signiﬁcant plantation disposal recently announced • Agreement reached on 25 April 2018 for sale of REA Kaltim’s 95 per cent shareholding in PBJ to Kuala Lumpur Kepong Berhad; proceeds estimated at $85 million gross or approximately $57 million net of external debt repayments and selling expenses Financial • Revenue up 26 per cent to $100.2 million (2016: $79.3 million) reﬂecting initial impact of operational improvements to restore yields to historic norms • Cost of sales increased to $86.3 million (2016: • Divestment serves to beneﬁt capital structure by reducing indebtedness and by relieving the group of the further investment that would be required to take the PBJ estates to full maturity; it will also defer for at least three years the need for a further group oil mill $71.8 million) primarily due to expenditure on rehabilitation of the mature estates and increased cost and volume of third party fruit purchases • No material negative impact on group’s immediate proﬁt outlook as the majority of the plantings at PBJ are immature • Pre-tax losses of $21.9 million (2016: $9.3 million), Stone and coal operations mainly due to increase in the value of the group’s sterling notes arising from exchange ﬂuctuations, resulting in a charge of $4.8 million in 2017 (2016: credit of $10.5) • Balance of 2017 dollar notes ($20.2 million) and 2017 sterling notes (£8.0 million) repaid • Sale of 2022 dollar notes held in treasury and placing of • Plans to reopen coal concession at Kota Bangun progressed with conclusion of arrangements to acquire loading point and conveyor with permitting now in hand to allow mining operations to recommence • Limestone quarry operations commenced preference shares together raising $18.0 million • Discussions regarding the development of the andesite Agricultural operations • Increased production of 530,565 tonnes of FFB, up stone concession continuing Organisational changes 13 per cent (2016: 468,371 tonnes), benefiting from improvements in harvesting, infrastructure and ﬁeld management practices • Appointment of Carol Gysin as group managing director in February 2017 and several senior management changes implemented • Increase in third party FFB purchased to 114,005 tonnes • Completion of relocation of Indonesian administrative (2016: 98,052 tonnes) ofﬁces to a single location in Balikpapan • Consistently improved CPO extraction rates averaging Outlook 23 per cent • 1,248 hectares of extension planting • The recovery seen in 2017 anticipated to strengthen further in 2018 with crop levels and yields returning closer to historic norms • FFB for the four months to April 2018 expected to be around 200,000 (2017: 159,706) • Divestment of PBJ to enable group to concentrate operations on the remaining plantation areas in near contiguous locations • Coal activities expected to provide cash ﬂows going forward R.E.A. Holdings plc Annual Report and Accounts 2017 03 O v e r v i e w S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 04 Overview Ofﬁcers and advisers Directors D J Blackett I Chia C E Gysin J C Oakley R M Robinow M A St. Clair-George Secretary and registered ofﬁce R.E.A. Services Limited First Floor 32-36 Great Portland Street London W1W 8QX Stockbrokers Mirabaud Securities LLP 10 Bressenden Place London SW1E 5DH Solicitors Ashurst LLP Broadwalk House 5 Appold Street London EC2A 2HA Auditor Deloitte LLP Hill House 1 Little New Street London EC4A 3TR Registrars and transfer ofﬁce Link Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU 04 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 05 Overview Maps TTa abang g (cid:122) (cid:122) EAST ALIMK ANTTA AN vRR inaketneS v ii r r ee M M SS e ee n nn y yy i ii u uu r rr R RR i ii v v ee r r K embang J (cid:122)(cid:122) anggut B ee l l aa y y aa n nn R RR i ii vv v e ee r r Muar a A ncalong K e d a n g KK e e p aa l l a RR i ii v v e r onB tang (cid:122) MMa aah hh aa a k kk a aa revveiRmakahaMMa m mm R R RR i iii v v v ee r r (cid:122) ota B K angun TTe enggar (cid:122) ong S amarinda (cid:87) 00 10 20 30 40 50 k m alikB papan AKM ASSAR ST TR AIT (cid:67) The smaller map shows the location of the group’s operations within the context of South East Asia. The larger map provides a plan of the operational areas and of the river system by which access is obtained to the main areas. Key Companies Methane capture plant Oil mill Stone source Coal concession Tank storage PT Putra Bongan Jaya CDM PT Cipta Davia Mandiri KKS PT Kartanegara Kumalasakti KMS PT Kutai Mitra Sejahtera PBJ PBJ2 PT Persada Bangun Jaya REAK PT REA Kaltim Plantations SYB PT Sasana Yudha Bhakti PU PT Prasetia Utama SYB SYB land transfer R.E.A. Holdings plc Annual Report and Accounts 2017 05 O v e r v i e w S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 06 Overview Chairman’s statement 2017 saw the beginnings of a much needed recovery in the group’s operations. Following changes to stafﬁng and staff responsibilities in both estates and mills and with the estates beginning to beneﬁt from the enhanced fertiliser programmes initiated in 2016, harvesting, ﬁeld management practices, mill efﬁciency and road maintenance all progressively improved over the course of the year. Total revenue for the year increased to $100.2 million from $79.3 million in 2016. Operating losses were reduced to $2.2 million compared with $5.0 million in 2016. Although the loss before tax increased to $21.9 million compared with $9.3 million for 2016, this was principally the result of a negative swing from year to year of $15.3 million in mark to market movements on the group’s foreign currency liabilities, with a charge to proﬁts of $4.8 million in 2017 compared with a credit of $10.5 million in 2016. In addition, and as previously reported, a one off charge of $1.1 million was incurred in 2017 as a result of staff changes arising from the reorganisation of the group’s Indonesian ofﬁces. By contrast, the results for 2016 benefited from a one off receipt of $1.1 million received in respect of tax refunds. Fresh fruit bunches (“FFB”) harvested increased by 13 per cent in 2017 to some 530,000 tonnes, compared with 468,000 tonnes in 2016. This reﬂected an 8 per cent increase in mature estate hectarage and an improvement in FFB yields to 15.6 tonnes per mature hectare in 2017 from 14.9 tonnes in 2016. There was a similar increase in the volume of purchases of FFB from smallholders and other third parties: 114,000 tonnes in 2017 compared with 98,000 tonnes in the previous year. Crude palm oil (“CPO”) production in 2017 totalled 144,000 tonnes, compared with 128,000 tonnes in 2016, with CPO extraction in the latter part of 2017 running at consistently higher average rates than in 2016 and the early months of 2017. The better performance reﬂected recent mill refurbishment works, a rigorous maintenance programme, as well as an improvement in the quality of FFB being processed. CPO and crude palm kernel oil (“CPKO”) yields of, respectively, 3.6 and 0.3 tonnes per mature hectare were achieved during 2017 compared with, respectively, 3.4 tonnes and 0.3 tonnes per hectare in 2016. The CPO price, CIF Rotterdam, had a strong start to the year rising from $790 per tonne at the beginning of January to a high of $857 per tonne on the back of generally lower production before declining to a low of $640 per tonne reﬂecting increasing stock levels and expectations of signiﬁcant production growth in the second half of the year. The price closed at the end of the year at $670 per tonne and has traded in the range $640 to $710 per tonne in 2018 to date. Prices are currently at $640 per tonne. Consumption growth and weaker soybean production in South America appears likely to support prices around these levels. Progress with development of both PT Putra Bongan Jaya (“PBJ”) and PT Cipta Davia Mandiri (“CDM”) was slower than expected in 2017. Weather conditions throughout the year hampered extension planting in PBJ and a review of the programme for CDM resulted in a decision to cancel planting of some 1,000 hectares that had been originally planned so as to concentrate on larger, near contiguous blocks as well as to reconsider the status of the conservation reserves. Planting in PBJ and CDM combined amounted to some 1,161 hectares in 2017, with the balance of the targeted 3,000 hectares carried over to 2018. Plans to reopen the group’s coal concession at Kota Bangun were progressed during 2017 leading to the conclusion by the group, in April 2018, of arrangements to acquire an established loading point on the Mahakam River, together with a coal conveyor that crosses the group’s concession and runs to the loading point. This acquisition is an essential prerequisite to efﬁcient evacuation of coal from the Kota Bangun concession. With it concluded, the group is applying for the requisite permits to recommence mining operations and to sell the previously mined coal currently held in stockpile. Discussions regarding the development of the group’s andesite stone concession continue. The group further addressed its funding arrangements during 2017, raising monies from the sale of the $7.2 million of 2022 dollar notes held in treasury, the issue of 8.4 million new £1 cumulative preference shares and the completion of the arrangements agreed with the group’s new local partner in 2016. In addition, revolving working capital facilities were rolled over for a further 12 months at the end of July 2017. All of the outstanding $20.2 million of 2017 dollar notes and the outstanding £8.0 million of 2017 sterling notes were repaid in June and December 2017 respectively. Further to the statement in the group’s half yearly report published in September 2017 regarding a potential divestment of certain outlying plantation assets, the group reached an agreement on 25 April 2018 for the sale of its PBJ subsidiary. Completion of the sale, which is subject to shareholder approval, is expected to take place later in 2018 and will result in group indebtedness being reduced by the bank borrowings in PBJ and a cash inﬂow to the group provisionally estimated at $57 million. The PBJ estate is located some distance from the group’s principal estates and would, in the near future, have required the construction of a new mill and other infrastructure for harvesting and processing crop. Divestment of PBJ will therefore both reduce the funding required for the group’s immediate development programme and permit the group’s management to focus on a geographically more compact area of operations. 06 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 07 The proceeds from the divestment of PBJ will principally be applied in reducing group indebtedness. Coupled with the funding actions taken over the last two years, this divestment leaves the group in a stronger ﬁnancial position. It will permit the group to operate with signiﬁcantly reduced indebtedness and, at the same time, to proceed quickly to develop suitable areas of its remaining undeveloped land bank. Following the completion in 2017 of the agreements for the transfer to SYB of fully titled land areas held by PU, the remaining developable land bank following the sale of PBJ is currently estimated at about 10,000 hectares. The immediate impact on production of the sale of PBJ will be immaterial as the majority of this estate is not yet mature. In view of the results for 2017, the directors have concluded that they should not declare or recommend the payment of any ordinary dividend in respect of the year. The recovery in group operations that began in 2017 has continued into 2018, with production in March demonstrating a noticeable upturn, against a background of generally poorer cropping in East Kalimantan. The positive trend has continued into April, with daily cropping rates suggesting an FFB crop for the month approaching 60,000 tonnes (2016: 32,070 tonnes). Higher production combined with increases in mill efﬁciency should result in further progress in the group’s operational performance during the current year. The improvements to the group’s balance sheet that will follow from the divestment of PBJ and a resumption of coal revenues should help the group accelerate development of its land bank. With CPO prices expected to remain around current levels, the prospects for the group are more encouraging than they have been for some years. DAVID J BLACKETT Chairman O v e r v i e w S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 07 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 08 Strategic report Introduction and strategic environment Introduction Business model and resources This strategic report has been prepared to provide holders of the company’s shares with information that complements the accompanying ﬁnancial statements. Such information is intended to help shareholders in understanding the group’s business and strategic objectives and thereby assist them in assessing how the directors have performed their duty of promoting the success of the company. This report should not be relied upon by any persons other than shareholders or for any purposes other than those stated. The report contains forward-looking statements, which have been included by the directors in good faith based on the information available to them up to the time of their approval of this report. Such statements should be treated with caution given the uncertainties inherent in any prognosis regarding the future and the economic and business risks to which the group’s operations are exposed. In preparing this report, the directors have complied with section 414C of the Companies Act 2006. The report has been prepared for the group as a whole and therefore gives emphasis to those matters that are signiﬁcant to the company and its subsidiaries when taken together. The report is divided into the following sections: • • • • • • Introduction and strategic environment Agricultural operations Stone and coal operations Sustainability Finance Risks and uncertainties The balance of this ﬁrst section discusses the group’s business model and resources, its objectives and strategy for achieving these, the market context in which the group operates and the quantitative indicators that the directors consider relevant to assessment of the group’s performance. The sections on “Agricultural operations” and “Stone and coal operations” review the current status of and trends within the group’s activities and the group’s plans for their further development. “Sustainability” deals with environmental and social issues facing the group while “Finance” provides explanations regarding amounts disclosed in the ﬁnancial statements, the group’s ﬁnancial resources and its ability to fund its declared strategies. “Risks and uncertainties” itemises those risks and uncertainties currently faced by the group that the directors consider to be material. The group is principally engaged in the cultivation of oil palms in the province of East Kalimantan in Indonesia and in the production and sale of crude palm oil (“CPO”) and crude palm kernel oil (“CPKO”). Ancillary to these activities, the group generates renewable energy from its methane capture plants to provide power for its own operations and also for sale to local villages via the Indonesian state electricity company (“PLN”). The group also holds interests in respect of two stone deposits and two coal mining concessions, all of which are located in East Kalimantan. Detailed descriptions of the group’s oil palm and related activities and of its stone and coal interests are provided under, respectively, “Agricultural operations” and “Stone and coal operations” below. The group and predecessor businesses have been involved for over one hundred years in the operation of agricultural estates growing a variety of crops in developing countries in South East Asia and elsewhere. Today, the group sees itself as marrying developed world capital and Indonesian opportunity by offering investors in, and lenders to, the company the transparency of a company listed on a stock exchange of international standing while using capital raised by the company (or with the company’s support) to develop natural resource based operations in Indonesia from which the group believes good returns can be achieved. The knowledge and expertise gained from the group’s long involvement in the plantation industry represent signiﬁcant intangible resources that underpin the group’s credibility. This is important when sourcing capital, working closely with the Indonesian authorities in relation to project development and recruiting a high calibre experienced management team familiar with Indonesian regulatory processes and social customs and committed to sustainable practices. Other resources important to the group are its established base of operations, large, and near contiguous, land concessions, and a trained workforce with strong links to the local community. Objectives and general strategy The group’s objectives are both to provide attractive overall returns to investors in the shares and other securities of the company from the operation and expansion of the group’s existing businesses and to foster social and economic progress in the localities of the group’s activities, while maintaining high standards of sustainability. Achieving these objectives is dependent upon, among other things, the group’s ability to generate operating proﬁts sufﬁcient to enable the group to realise its ambitions. 08 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 09 CPO and CPKO are primary commodities that, as such, are sold at prices determined by world supply and demand. Such prices ﬂuctuate in ways that are difﬁcult to predict and that the group cannot control. The group’s operational strategy is therefore to concentrate on minimising unit production costs, without compromising on quality or its objectives as respects sustainable practices, with the expectation that, as a lower cost producer, the group will have greater resilience in any downturn in prices than competitor producers. In the agricultural operations, the group adopts a two-pronged approach in seeking production cost efﬁciencies. First, the group aims to capitalise on its available resources by developing its land bank as rapidly as logistical, ﬁnancial and regulatory constraints permit while utilising the group’s existing agricultural management capacity to manage the resultant larger business. Secondly, the group strives continually to improve the productivity and efﬁciency of its established agricultural operations. The stone and coal mining interests represent group diversiﬁcations. The directors believe that quarrying of the group’s stone deposits will improve the durability of infrastructure in its agricultural operations and in due course could also provide useful additional revenue from the sale of stone to third parties. Following a decision in 2012 to limit further capital committed to the coal mining interests, the group’s strategy for these interests is to maximise the recovery of capital already invested. The group’s ﬁnancial strategy is to enhance returns to equity investors in the company by procuring that a prudent proportion of the group’s funding requirements is met with prior ranking capital in the form of ﬁxed return permanent preferred capital and debt with a maturity proﬁle appropriate to the group’s projected future cash ﬂows. The group recognises that its agricultural operations, of which the total assets at 31 December 2017 represented some 92 per cent of the group’s total assets and which, in 2017, contributed substantially all of the group’s revenue, lie within a single locality and rely on a single crop. This permits signiﬁcant economies of scale but brings with it some risks. Whilst further diversiﬁcation would afford the group some offset against these risks, the directors believe that, for the foreseeable future, the interests of the group and its shareholders will be best served by growing and developing the existing operations. They therefore have no plans for further diversiﬁcation. O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Future direction An Indonesian plantation law enacted in October 2014, conﬁrming a 100,000 hectare limit on licensed development of oil palms for entities that are not listed and not under majority local ownership, should not impact the group in the foreseeable future as the group has signiﬁcant headroom for development within this limit. The conditional sale of PT Putra Bongan Jaya (“PBJ”) as discussed below means that the likelihood of such a limit being of consequence to the group is more remote. However, the continuing growth of the Indonesian economy and a gradual shift in Indonesian political opinion towards encouraging and potentially mandating increased local ownership of Indonesian oil palm operations has reinforced the directors’ long-held view on the desirability of increasing Indonesian participation in the ownership of the group’s agricultural operations. To this end, in 2016 the directors concluded a transaction with a strategic investor in the group’s principal operating subsidiary, PT REA Kaltim Plantations (“REA Kaltim”) whereby subsidiary companies of PT Dharma Satya Nusantara Tbk ("DSN"), acquired, by a combination of subscription for new shares and the acquisition of existing shares, a 15 per cent equity interest in REA Kaltim. DSN is an Indonesian natural resources company listed on the Indonesia Stock Exchange in Jakarta and engaged in the business of oil palm plantations and wood products, with plantation estates based in East, Central and West Kalimantan. Through its association with DSN the group beneﬁts from exchanges of information on agronomic and related practices and there may be scope in due course for more efﬁcient sourcing of supplies and marketing of produce. The group has acknowledged that DSN may increase its participation in REA Kaltim to an eventual level of 49 per cent by gradual stages over a period of ﬁve years, but on the basis that each increase will be subject to agreement of the price and other terms at the time of such increase and to the receipt of all necessary consents and approvals, including the approval of the company’s shareholders to the extent required. On 25 April 2018 REA Kaltim entered into a conditional agreement for the sale of REA Kaltim’s 95 per cent interest in PBJ to Kuala Lumpur Kepong Berhad (“KLK”). The disposal enables the group to release the intrinsic value that has built up in developing PBJ, which, as a recently planted property, has excellent potential but is not currently proﬁtable. The divestment will beneﬁt the group’s capital structure by reducing indebtedness, by relieving the group of the further investment that would be required to take the PBJ estates to full maturity and will also defer for at least three years the need for a further group oil mill. Further, the divestment will permit the group to focus its efforts on its remaining plantings which are concentrated within a single geographical area. R.E.A. Holdings plc Annual Report and Accounts 2017 09 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 10 Strategic report Introduction and strategic environment continued The vegetable oil market context According to Oil World, worldwide consumption of the 17 major vegetable and animal oils and fats increased by 3 per cent to 214 million tonnes in the year to 30 September 2017 (of which vegetable oils represented 160 million tonnes). World production of the same group of vegetable oils and fats during the same period was 215 million tonnes with vegetable oils accounting for 161 million tonnes of which CPO represented 65 million tonnes (some 30 per cent of the total). Total vegetable oil production is currently forecast by Oil World to rise by 3 per cent in 2018 to 222 million tonnes, driven principally by a recovery in CPO production following the 2015-2016 El Niño, and increased production of soybean oil. Total CPO production is projected to account for approximately 69 million tonnes of the total. Vegetable and animal oils and fats have conventionally been used principally for the production of cooking oil, margarine and soap. Consumption of these basic commodities correlates with population growth and, in less developed areas, with per capita incomes and thus economic growth. Demand is therefore driven by the increasing world population and economic growth in the key markets of China and India. Vegetable and animal oils and fats can also be used to provide biofuels and, in particular, biodiesel. The principal competitors of CPO are the oils from the annual oilseed crops, the most signiﬁcant of which are soybean, oilseed rape and sunﬂower. Because these oilseeds are sown annually, their production can be rapidly adjusted to meet prevailing economic circumstances with high vegetable oil prices encouraging increased planting and low prices producing a converse effect. Accordingly, in the absence of special factors, pricing within the vegetable oil and fat complex can be expected to oscillate about a mean at which adequate returns are obtained from growing the annual oilseed crops. Since the oil yield per hectare from oil palms (at up to seven tonnes) is much greater than that of the principal annual oilseeds (less than one tonne), CPO can be produced more economically than the principal competitor oils and this provides CPO with a natural competitive advantage within the vegetable oil and animal fat complex. Within vegetable oil markets, CPO should also continue to beneﬁt from health concerns in relation to trans-fatty acids. Such acids are formed when vegetable oils are artiﬁcially hardened by partial hydrogenation. Poly-unsaturated oils, such as soybean oil, rape oil and sunﬂower oil, require partial hydrogenation before they can be used for shortening and other solid fat applications but CPO does not. The directors believe that demand for, supply of and consequent pricing of, vegetable and animal oils and fats will ultimately be driven by fundamental market factors. However, they also recognise that normal market mechanisms can be affected by government intervention. It has long been the case that some areas (such as the EU) have provided subsidies to encourage the growing of oilseeds and that such subsidies have distorted the natural economics of producing oilseed crops. There have also been actions by governments attempting to reduce dependence on fossil fuels. These have included steps to enforce mandatory blending of biofuel as a ﬁxed minimum percentage of all fuels and subsidies to support the cultivation of crops capable of being used to produce biofuel. In recent years, biofuel has become an important factor in the vegetable oil markets. According to Oil World, biofuel production in the year to 30 September 2017 accounted for some 15 per cent of global vegetable oil consumption. There is substantial evidence that over a period of several years there has been a correlation between vegetable oil and petroleum oil prices but, following the sharp decline in petroleum oil prices during 2015, it appears that the correlation has, for the time being at least, been broken. There are probably two principal reasons for this: the continuing growth in food consumption of vegetable oils and the fact that not all conversion of vegetable oils to biofuels is dependent upon market factors. An increasing element of biofuel use reﬂects government mandates. In Indonesia, for example, a levy on exports of CPO of $50 per tonne introduced in July 2015 is being used to subsidise biodiesel production and is leading to increasing amounts of CPO being converted to biodiesel for internal consumption. The resultant effect is that the economics of producing biodiesel (which, subsidies apart, are dependent upon the price of competing petroleum based diesel) are not currently the determinant of vegetable oil prices so that those prices no longer correlate with energy prices. This situation would, of course, change should petroleum oil prices recover materially from present levels and restore the economics of manufacturing unsubsidised biodiesel. A graph of CIF Rotterdam spot CPO prices for the last ten years, as derived from prices published by Oil World, is shown on the adjacent page. The monthly average price over the ten years has moved between a high of $1,292 per tonne and a low of $488 per tonne. The monthly average price over the ten years as a whole has been $837 per tonne. The CPO price, CIF Rotterdam, had a strong start to 2017 rising from $790 per tonne at the beginning of January to $857 per tonne by the middle of the month on the back of generally lower production. Thereafter, with stock levels increasing and expectations of signiﬁcant production growth in the second half of the year, the price declined, reaching a low point of $645 at the end of June and ending the year at 10 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 11 Crude palm oil monthly average price 1400 1200 1000 800 600 400 200 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 $670. Prices are currently at $640 per tonne and expectations are that they will at least remain stable at, and might appreciate slightly above, this level over the period to the end of 2018. These expectations reﬂect projections that further growth in CPO production will be offset by reduced production of soybeans in South America and continuing consumption growth in China and India. Whilst the introduction by China of a new tariff on US soybeans may result in some adjustments within soybean markets, it seems unlikely materially to change worldwide consumption of vegetable oils. The Indonesian context 2017 was another steady year for the Indonesian economy, under the helm of President Joko Widodo (“Jokowi”). With a GDP growth rate for the year of 5.1 per cent (2016: 5.0 per cent) Indonesia was again one of the best performing countries in the South East Asian region behind India and China. Growth was largely driven by the many nationwide infrastructure projects that are now showing tangible progress, as well as the gradual recovery in global commodity prices in the second half of 2017, although offset by some slowdown in domestic consumption. The ofﬁcial inﬂation rate was reported as 3.6 per cent (2016: 3.0 per cent) although real inﬂation, particularly in the outer islands, was undoubtedly higher as evidenced by an average 8.7 per cent increase in the minimum wage, effective from 1 January 2018, in the three Regencies in which the group operates in East Kalimantan. The Indonesian rupiah opened 2017 at Rp 13,436 = $1 and closed the year at Rp 13,548 = $1, although for most of the year it traded around the level of Rp 13,300 = $1. The early months of 2018 have seen some weakening in the rate to a current level of Rp 13,880 = $1. These positive macro-economic indicators and the many highly visible major infrastructure projects underline the progress that the government of President Jokowi has made on delivering on key election pledges of reduced unemployment, increased infrastructure investment and structural reform. With the next national and Presidential elections set to take place in 2019, Jokowi, as the Presidential candidate nominated by the Partai Demokrasi Indonesia R.E.A. Holdings plc Annual Report and Accounts 2017 11 O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 12 Strategic report Introduction and strategic environment continued Perjuangan (PDIP) coalition under the leadership of Megawati Soekarnoputri, is well placed to secure re-election with a strong mandate. In East Kalimantan, the local economy has been boosted by the recovery of coal prices which have allowed many small mines to recommence operations. However, the oil palm sector continued to feel the impact of the 2015-2016 El Niño in 2017 with many estates seeing production in the second half of the year well below production levels experienced in the ﬁrst half. The term of the existing Governor of East Kalimantan will expire in December 2018. The ﬁrst round of voting in the election of a new Governor will be held in June 2018. Following the withdrawal of the Regent of Kutai Kartanegara, who was the previous front runner, the 2018 race is now open with four pairings cleared to run. Throughout 2017, Indonesia continued to apply its previously established sliding scales of duty on exports of CPO and CPKO. Under these scales, no export duty is payable when the price of CPO, CIF Rotterdam, falls below approximately $750 per tonne. However, the ﬂat rate export levy of $50 per tonne (used to subsidise bio fuel prices and replanting by small holders) is applied to all export sales of CPO and CPKO regardless of selling price. Evaluation of performance In seeking to meet its expansion, efﬁciency and sustainability objectives, the group sets operating standards and targets for most aspects of its activities and regularly monitors performance against those standards and targets. For many aspects of the group’s activities, there is no single standard or target that, in isolation from other standards and targets, can be taken as providing an accurate continuing indicator of progress. In these cases, a collection of measures has to be evaluated and a qualitative conclusion reached. The directors do, however, rely on regular reporting of certain key performance indicators that are comparable from one year to the next, in addition to monitoring the key components of the group’s proﬁt and loss account and balance sheet. These performance indicators are summarised in the table below. Quantiﬁcations of the indicators for 2017 with, where available, comparative ﬁgures for 2016 are provided in the succeeding sections of this report, with each category of indicators being covered in the corresponding section of the report. 12 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 13 Performance indicator Agricultural operations New extension area planted Crop of fresh fruit bunches (“FFB”) harvested Measurement Purpose The area in hectares of new land planted out during the applicable period The weight in tonnes of FFB delivered to oil mills from the group’s estates during the applicable period CPO extraction rate achieved The percentage by weight of CPO extracted from FFB processed Palm kernel extraction rate achieved The percentage by weight of palm kernels extracted from FFB processed CPKO extraction rate achieved The percentage by weight of CPKO extracted from palm kernels crushed To measure performance against the group’s expansion objective To measure ﬁeld efﬁciency and assess the extent to which the group is achieving its objective of maximising output from its operations To measure mill efﬁciency and assess the extent to which the group is achieving its objective of maximising output from its operations To measure mill efﬁciency and assess the extent to which the group is achieving its objective of maximising output from its operations To measure mill efﬁciency and assess the extent to which the group is achieving its objective of maximising output from its operations Stone and coal operations Stone or coal produced Sustainability Work related fatalities Smallholder percentage Greenhouse gas emissions per tonne of CPO and per planted hectare Finance Return on adjusted equity Net debt to total equity The weight in tonnes of stone or coal extracted from each applicable concession during the applicable period To measure production efﬁciency and assess the extent to which the group is achieving its objective of maximising output from its operations Number of work related fatalities during the applicable period To measure the efﬁcacy of the group’s health and safety policies The area of associated smallholder plantings expressed as a percentage of the planted area of the group’s estates To measure performance against the group’s smallholder expansion objective Greenhouse gas emissions measured in tonnes of CO2 equivalent divided, respectively, by the weight of CPO extracted from FFB processed and by the number of group planted hectares supplying the group mills Proﬁt before tax for the period less amounts attributable to preferred capital expressed as a percentage of average total equity (less preferred capital) for the period Borrowings and other indebtedness (other than intra group indebtedness) less cash and cash equivalents expressed as a percentage of total equity To measure the intensity of the group’s greenhouse gas emissions To measure the group’s ﬁnancial performance To assess the risks of the group’s capital structure R.E.A. Holdings plc Annual Report and Accounts 2017 13 O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 14 Strategic report Agricultural operations Structure Land areas All of the group’s agricultural operations are located in East Kalimantan and have been established pursuant to an understanding dating from 1991 whereby the East Kalimantan authorities undertook to support the group in acquiring, for its own account and in cooperation with local interests, substantial areas of land in East Kalimantan for planting with oil palms. The oldest planted areas, which represent the core of the group’s agricultural operations, are owned through REA Kaltim in which a group company holds an 85 per cent interest. With the REA Kaltim land areas approaching full utilisation, over the four-year period from 2005 to 2008 the company established or acquired ﬁve additional Indonesian subsidiaries, each potentially bringing with it a substantial allocation of land in the vicinity of the REA Kaltim estates. Each of these ﬁve subsidiaries is currently owned as to 95 per cent by REA Kaltim and 5 per cent by Indonesian local investors. Two more recently acquired subsidiaries, PBJ2 (acquired in 2012) and PU (acquired in 2017), are similarly owned. A diagram showing the structure of the REA Kaltim sub-group is set out below. The operations of REA Kaltim are located some 140 kilometres north west of Samarinda, the capital of East Kalimantan, and lie either side of the Belayan river, a tributary of the Mahakam, one of the major river systems of South East Asia. The SYB area is contiguous with the REA Kaltim areas and together these form a single site falling within the Kutai Kartanegara regency of East Kalimantan. The PBJ area, which is now subject to divestment, sits some 70 kilometres to the south of the REA Kaltim areas in the West Kutai regency of East Kalimantan while the CDM, KMS and KKS areas are located in close proximity to each other in the East Kutai regency of East Kalimantan less than 30 kilometres to the east of the REA Kaltim areas. A strip of land previously held by PBJ2 and bordering the PBJ land areas was reallocated to PBJ during 2017. The balance of the PBJ2 land is adjacent to the land areas held by REA Kaltim and SYB. The REA Kaltim and adjacent areas are most readily accessed by river. In 2015, a new road was constructed between Tabang (a town to the north of the REA Kaltim estates) and Kota Bangun connecting via a bridge over the Mahakam River with an existing road from Kota Bangun to Samarinda (the capital of East Kalimantan). This new road passes through the REA Kaltim estates and potentially provides the group with alternative transport options which can be of value when excessively dry periods affect river access. However, the very heavy rains of the past two years have damaged the new road so that until the road is resurfaced its value as an alternative transport route is limited. A bridge across the Senyiur River links REA Kaltim and the KMS, CDM and KKS areas. The PBJ area is easily accessible by road. REA Kaltim sub-group PT REA Kaltim Plantations REA Kaltim PT Cipta Davia Mandiri CDM PT Kartanegara Kumala Sakti KKS PT Kutai Mitra Sejahtera KMS PT Putra Bongan Jaya PBJ PT Sasana Yudha Bhakti SYB PT Persada Bangun Jaya PBJ2 PT Pr(cid:66)(cid:84)(cid:70)(cid:85)(cid:74)(cid:66) (cid:54)(cid:85)(cid:66)(cid:78)(cid:66) P(cid:54) 14 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 15 Although the 1991 understanding established a basis for the provision of land for development by, or in cooperation with, the group, all applications to develop previously undeveloped land areas have to be agreed by the Indonesian Ministry of Forestry and have to go through a titling and permit process. This process begins with the grant of an allocation of Indonesian state land by the Indonesian local authority responsible for administering the land area to which the allocation relates (an “izin lokasi”). Allocations are normally valid for periods of between one and three years but may be extended if steps have been taken to obtain full titles. After a land allocation has been obtained (either by direct grant from the applicable local authority or by acquisition from the original recipient of the allocation or a previous assignee), the progression to full title involves environmental and other assessments to delineate those areas within the allocation that are suitable for development, settlement of compensation claims from local communities and other necessary legal procedures that vary from case to case. The titling process is then completed by a cadastral survey (during which boundary markers are inserted) and the issue of a formal registered land title certiﬁcate (an “hak guna usaha” or “HGU”). Separately, central government and local authority permits are required for the development of land. These permits are often issued in stages. During 2017, the overall area of the group’s fully titled agricultural land increased from 70,584 hectares to 76,127 hectares following completion of the transfer to SYB and a local minority shareholder of PU shares the subject of exchange arrangements agreed in 2015 with PT Ade Putra Tanrajeng (“APT”). PU holds fully titled land areas of 9,097 hectares located on the southern side of the Belayan River opposite the SYB northern areas and is linked by a government road to the southern REA Kaltim areas. By way of exchange, SYB has agreed to transfer to APT 3,554 hectares of fully titled SYB land and has relinquished 2,212 hectares of untitled land allocations, both areas being the subject of overlapping mineral rights held by APT. Pending completion of the transfer of the 3,554 hectares, APT and its associates have been granted access to commence mining in this area. In addition, at 31 December 2017, the group held and can potentially renew land allocations totalling 34,347 hectares. A provisional allocation of 12,050 hectares made many years ago to KKS was conditional upon rezoning of the area concerned. There is some doubt as to the success of such rezoning and parts of the area have become the subject of mining licences. Accordingly, the group is reviewing its options in respect of this area. O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Details of the land areas held by the group as at 31 December 2017 are set out below: Land areas Hectares Fully titled land CDM 9,784 KMS 7,321 PBJ* 11,602 PU 9,097 REA Kaltim 30,106 SYB 8,217 76,127 Land subject to completion of titling CDM 5,454 KKS (area adjacent to CDM) 5,150 KKS (provisional allocation) 12,050 KMS 1,964 PBJ* 4,460 PBJ2 5,269 34,347 *As noted under “Future direction” above, on 25 April 2018 the company entered into a conditional agreement for the sale of PBJ During 2017, 2,142 hectares previously held by PBJ2 that are adjacent to the existing PBJ land were reallocated to PBJ. However, in renewing the izin lokasi for the PBJ area as enlarged by this reallocation, there was a reduction of 246 hectares in the total area the subject of the izin lokasi. Extension of the CDM land allocation in 2017 also resulted in a net reduction of 826 hectares. Other areas that are not yet fully titled in KMS and PBJ2 can be expected to result in reduced hectarage upon renewal of allocations. Moreover, areas the subject of land allocations may be further reduced on full titling as land the subject of conﬂicting claims, deemed unsuitable for oil palm cultivation or allocated for smallholder cooperatives may be excluded. Not all areas in respect of which full HGU titles are issued can be planted with oil palms. Some fully titled land may be unsuitable for planting, a proportion must be set aside for conservation and a further proportion will be required for roads, buildings and other infrastructural facilities. Following the sale of PBJ, the directors believe that the remaining fully titled land and land allocations will permit extension of the group’s retained oil palm plantings to an eventual total planted area approaching 50,000 hectares. With land prices rising and increasing interest in plantation development, land is much less available than was the case in 1991 when the group was ﬁrst established in East Kalimantan. Moreover, the Indonesian government is now applying a “use it or lose it” policy to land. Pursuant to this policy, land allocations and titles may be rescinded if the land concerned is not utilised within a reasonable period for the purposes for which it was allocated. The group must therefore be careful in managing its land bank to ensure that it can R.E.A. Holdings plc Annual Report and Accounts 2017 15 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 16 Strategic report Agricultural operations continued demonstrate clear plans for the development of all of its undeveloped land holdings. Land development Areas planted as at 31 December 2017 amounted in total to 44,094 hectares. Of this total, mature plantings comprised 34,076 hectares having a weighted average age of 13 years. A further 777 hectares planted in 2014 were scheduled to come to maturity at the start of 2018. The breakdown by planting year of the total of 44,094 planted hectares (which exclude planted areas to be relinquished by SYB upon completion of the SYB land swap agreement described under “Land areas” above) is shown below. Planted areas Hectares Mature areas 1994 416 1995 1,956 1996 2,272 1997 2,479 1998 4,829 1999 351 2000 874 2004 3,190 2005 2,279 2006 3,362 2007 3,455 2008 991 2009 625 2010 1,419 2011 1,073 2012 1,950 2013 2,555 34,076 Immature areas 2014 777 2015 2,236 2016 5,757 2017 1,248 44,094 Planted areas that complete a planned planting programme for a particular year but are planted in the early months of the succeeding year are normally allocated to the planting year for which they were planned. The above table includes a total of 232 hectares of ﬂood prone areas forming part of the 2009 and 2010 plantings at CDM that were previously abandoned but may be recoverable. Towards the end of 2017, the group conducted a review of the development programme for CDM. As a consequence of this review, the planting of 1,000 hectares originally planned in CDM was cancelled in order to concentrate on larger, near contiguous blocks within this estate with a view to completing this development in the most cost-effective manner. At the same time, it was decided to examine carefully the status of the important conservation reserves in the wetland area which the group is concerned to protect. This review is continuing and a decision regarding how best to manage this area will be taken in due course. Development work at PBJ was hampered by the weather conditions throughout 2017 as extension planting, planned to occur predominantly in lower lying areas in the north west section, had to be postponed until consistently drier weather would permit bunding to control ﬂooding to be completed. Delays in the PBJ planting and the review of the CDM development programme meant that, as previously announced, the target of completing 3,000 hectares in PBJ and CDM combined in 2017 was not achieved. Cumulative development for the year is detailed below: PBJ CDM Total hectares hectares hectares Cleared, not yet planted at 1 January 2017 492 1,089 1,581 Cleared, during 2017 351 429 780 Cleared, not yet planted at 31 December 2017 (595) (605) (1,200) Planted during the period 248 913 1,161 The balance of the targeted 3,000 hectares has been carried over to 2018 and, following completion of this, extension planting in 2018 is now expected to be concentrated on PU. As weather conditions become more favourable and with certain land issues in respect of the remaining pockets of immediately plantable land in PBJ now resolved, clearing and planting of PBJ will continue in the coming months as completion of the sale of PBJ is not expected to occur before 31 August 2018. There remain some additional areas for planting out in KMS which should increase the 4,500 hectares that have been planted to date to an eventual total of some 4,800 hectares. Of this total, some 750 hectares that were planted in 2013 will in due course be transferred to village cooperatives. At current cost levels, extension planting in areas adjacent to the existing developed areas still offers the prospect of good returns. Accordingly, it remains the policy of the directors that, subject to ﬁnancial and logistical constraints, the group should continue its expansion and should aim over time to plant with oil palms all suitable undeveloped land available to the group (other than areas set aside by the group for conservation). Such expansion will, however, involve a series of discrete annual decisions as to the area to be planted in each forthcoming year and the rate of planting may be accelerated or scaled back in the light of prevailing circumstances. Moreover, the group’s capacity for extension development is likely to remain dependent upon the rate at which the group can make additional land areas available for planting. 16 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 17 Processing and transport facilities The group currently operates three oil mills in which the FFB crops harvested from the mature oil palm areas are processed into CPO and palm kernels. The two older mills date from 1998 and 2006 respectively and each is designed to have effective processing capacity of 80 tonnes per hour. The third mill, operating since 2012, has a current capacity of 40 tonnes per hour but is being expanded to increase its capacity to 60 tonnes per hour. Completion of the installation works for a second boiler and other equipment needed to achieve this expansion was delayed in 2017 by extended lead times for deliveries. This provided the opportunity for the new head of mills, who was appointed mid-year and has extensive experience in managing palm oil mills in the region, to re- negotiate certain arrangements with suppliers and the works are now expected to conclude in the second half of 2018. Following an extensive programme of refurbishment, all but one of the four boilers in the group’s older mills have recently been reconditioned; reconditioning of the fourth boiler is continuing. Having two boilers in a mill provides resilience and facilitates downtime for the ongoing programme of routine maintenance and upgrading work required to maximise extraction rates, minimise oil losses and ensure that the design throughput is retained. Extraction rates improved in the second half of 2017 to consistently better levels than in 2016 as noted under “Crops and extraction rates” below. Once the recent plantings at KMS and the plantings at CDM reach a certain level of maturity, a further oil mill is likely to be needed to process the additional FFB production from these new areas. As production from the early plantings in PBJ has increased, processing arrangements have been agreed with a third-party mill in the vicinity, pending completion of the disposal of PBJ. In due course, PBJ would require its own mill. Existing processing capacity is, for the time being, sufﬁcient for the group’s own processing requirement and to process the current ﬂow of crops from smallholders. Two of the group’s oil mills incorporate, within the overall facilities, palm kernel crushing plants in which palm kernels are further processed to extract the CPKO that the palm kernels contain. The processing of kernels into CPKO avoids the material logistical difﬁculties and cost associated with the transport and sale of kernels. Each kernel crushing plant has a ﬁnal design capacity of 150 tonnes of kernels per day which is sufﬁcient to process kernel output from the group’s three oil mills. Total installed capacity is currently 250 tonnes per day. A ﬂeet of barges for transporting CPO and CPKO is used in conjunction with tank storage adjacent to the oil mills and a transhipment terminal owned by the group downstream of the port of Samarinda. The core river barge ﬂeet, which is operated under time charter arrangements to ensure compliance with current Indonesian cabotage regulations, comprises a number of small vessels, ranging between 750 and 2,000 tonnes. These barges are used for transporting CPO and CPKO from the estates to the transhipment terminal for bulking and then either loading to buyers’ own vessels on an FOB basis or for loading to either a 4,000 tonne or 2,400 tonne sea-going barge. The sea-going barges, also operated under time charter arrangements, make deliveries to customers on a CIF basis in other parts of Indonesia. On occasion, the group also spot charters additional barges for shipments and to provide temporary storage if required. The directors believe that ﬂexibility of delivery options is helpful to the group in its efforts to optimise the net prices, FOB port of Samarinda, that it is able to realise for its produce. Moreover, the group’s ability itself to deliver CPO on a CIF basis, buyer’s port, allows the group to make sales without exposure to the collection delays sometimes experienced with FOB buyers. The majority of CPO sales are now made to Indonesian reﬁneries in Balikpapan, East Kalimantan, and Kota Baru, South Kalimantan, which can be easily accessed from the group’s bulking station on the Mahakam River and to which the voyage time is much shorter than that to East Malaysia where historically the majority of CIF sales were made. During periods of lower rainfall (which normally occur for short periods during the drier months of May to August of each year), river levels on the upper part of the Belayan become more volatile and CPO and CPKO must be transferred by road from the mills to a point some 70 kilometres downstream at Pendamaran where the group has established a permanent loading facility and the year round loading of barges of up to 2,400 tonnes is possible. The group maintains its own ﬂeet of trucks to transport CPO and CPKO from the oil mills either to the usual loading points on the upper reaches of the Belayan River or to the downstream loading point at Pendamaran as weather conditions may dictate. The current river route downstream from the mature estates follows the Belayan River to Kota Bangun (where the Belayan joins the Mahakam River), and then the Mahakam through Tenggarong, the capital of the Kutai Kartanegara regency, Samarinda, the East Kalimantan provincial capital, and ultimately through the Mahakam delta into the Makassar Straits. When a fourth oil mill is eventually constructed to process FFB from the newer estates at KMS and CDM, the CPO and CPKO from that mill is likely to be evacuated by an alternative upstream route via the Kedang Kepala River which joins the Mahakam between Kota Bangun and Tenggarong. O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 17 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 18 Strategic report Agricultural operations continued Crops and extraction rates Key agricultural statistics for the year to 31 December 2017 (with comparative ﬁgures for the corresponding period of 2016) were as follows: FFB crops (tonnes) 2017 2016 Group harvested 530,565 468,371 Third party harvested 114,005 98,072 Total 644,570 566,423 Production (tonnes) Total FFB processed 630,600 560,957 CPO 143,916 127,697 Palm kernels 29,122 26,371 CPKO 11,052 9,840 Extraction rates (percentage) CPO 22.8 22.8 Palm kernels 4.6 4.7 CPKO 38.0 34.7 Rainfall (mm) Average across the estates 3,620 3,449 As previously reported, production showed a marked improvement in 2017. The recovery which started in the middle of 2017 continued into the second half when cropping was up 18 per cent to 342,000 tonnes of FFB from 290,000 tonnes of FFB in the ﬁrst half, notwithstanding that the outcome for the last quarter of the year was more muted than had been envisaged. This was partly because the remedial action required across the group’s estates in both the ﬁeld and infrastructure took longer than expected to complete and partly because of the number of harvesting days disrupted by rain during the traditional peak cropping period. Mill extraction rates in early months of 2017 reﬂected the harvesting and transportation difﬁculties noted above but started to recover towards the middle of the year and improved through the second half, to levels close to or above 23 per cent for CPO and 39 per cent for CPKO, compared with 22 per cent and 37 per cent in the ﬁrst half. The refurbishment works in the group’s two older mills and regular mill maintenance, as referred to under “Processing and transport facilities” above, coupled with a drive to improve the quality of third party FFB from smallholders and nearby estates have all contributed to the improvements in overall extraction rates now being achieved. Action to resurface and strengthen the group’s road infrastructure throughout 2017 and continuing into 2018 is steadily improving access to the mature areas and evacuation of harvested crop to the group’s mills. In PBJ, as detailed under “Stone and coal operations” below, stone is now being sourced from the group’s own quarry operations. This arrangement is expected to continue following completion of the sale of PBJ. In line with agronomy advice, fertiliser applications in the mature areas were signiﬁcantly increased for 2017 and it is planned that the higher dosage levels will be continued through 2018. Fertiliser applications in immature areas have always been maintained at high levels and therefore there have been no material changes for those areas. It is intended that some 1,000 hectares of mature areas hectares that have been damaged over the years by periodic ﬂooding will be bunded and resupplied in the next one to two years. These areas apart, the group retains good stands in all of its mature areas. Optimisation of ﬁeld disciplines and improving crop yields are increasingly evident in current production, which is gradually being restored to former standards and, in due course, to surpass those standards. Crops at the beginning of 2018 reﬂected an East Kalimantan wide poorer cropping period. However, March showed a noticeable upturn and this has continued into April. If the daily cropping rates currently being seen are maintained for the last few days of the month, crop of some 200,000 tonnes can be expected for the ﬁrst 4 months of the year (4 months to April 2017: 159,706 tonnes). Revenues During 2017, all of the group’s CPO and CPKO was sold in the local Indonesian market, reﬂecting continuing strong demand from easily accessible local reﬁners and the delivery efﬁciencies achievable from selling to this nearby customer base. The group has established relationships with each of the four main reﬁneries now operating in the region. Competition between these reﬁneries ensures that prices achieved are competitive. Local sales do not attract export duty but arbitrage between the local and international markets means that the price differential between the markets is normally an almost exact reﬂection of the additional imposts incurred on exports. CPO and CPKO sales are made on contract terms that are comprehensive and standard for each of the markets into which the group sells. The group therefore has no current need to develop its own terms of dealing with customers. CPO and CPKO are widely traded and the group does not therefore see the concentration of its sales on a small number of customers as a signiﬁcant risk. Were there to be problems with any one customer, the group could readily arrange for sales to be made further aﬁeld and, whilst this could result in 18 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 19 An additional three megawatts of generating capacity are dedicated to PLN, the Indonesian state electricity company, to use in supplying power to 26 villages and sub-villages surrounding the group’s estates by way of a local grid. Payment for the power so utilised is made by PLN to the company and the local district power company, Perusahaan Daerah Kelistrikan Dan Sumber Daya Energi Kabupaten Kutai Kartanegara (“Perusda”), at ﬁxed rates determined by Indonesian state regulations. The rate of uptake continues to grow and, as further households install prepay meters, power offtake from the group is projected to increase. Revenue from electricity sales amounted to some $627,000 in 2017, compared with $563,000 in 2016. PLN may, in due course, be able to increase its power capacity requirement to eight megawatts. Methane production could be further increased by installing a third methane capture plant in the group’s most recently constructed mill. There are other potential opportunities for cost reduction from the use of surplus methane, such as conversion of the group’s vehicle ﬂeet to run on a biomethane and diesel mix, which could reduce diesel consumption in the group’s vehicles by some 70 per cent. Other cost saving initiatives that have been implemented by the group in recent years include measures to reduce the use of pesticides, in-house production of harvester bridges and manufacture of bricks for housing using a mixture of cement and boiler ash from the mills. The group’s new information system, of which the ﬁrst phase was implemented in 2015, now provides transparent oversight of substantially all estate activities involving labour and production. Work continues on implementing ﬁeld inputting of data from handheld devices throughout the group’s operations and integrating the operational data being recorded with the group’s accounting records. additional delivery costs, the overall impact would not be material. With some revival in the International Sustainability and Carbon Certiﬁcation (“ISCC”) certiﬁed market, the group sold 62,566 tonnes of ISCC certiﬁed CPO and a further 3,001 tonnes of Roundtable for Sustainable Palm Oil (“RSPO”) certiﬁed CPKO during 2017 at premia of, respectively, $7 and $55 per tonne. As a rule, all CPO and CPKO produced by the group is sold on the basis of prices prevailing immediately ahead of delivery but, on occasions when market conditions appear favourable, the group may make forward sales at ﬁxed prices. The fact that export duty is levied on prices prevailing at date of delivery, not on prices realised, does act as a disincentive to making forward ﬁxed price sales since a rise in CPO prices prior to delivery of such sales will mean that the group will not only forego the beneﬁt of a higher price but may also pay export tax on, and at a rate calculated by reference to, a higher price than it has obtained. No deliveries were made against forward ﬁxed price sales of CPO or CPKO during 2017 and the group currently has no sales outstanding on this basis. The average prices per tonne realised by the group in respect of 2017 sales of CPO and CPKO, adjusted to FOB, Samarinda, and net of export duty were, respectively, $592 (2016: $521) and $1,134 (2016: $1,111). Operating efﬁciency The group’s costs principally comprise: direct costs of harvesting, processing and despatch; direct costs of upkeep of mature areas; estate and central overheads in Indonesia; the overheads of the UK head ofﬁce; and ﬁnancing costs. The group’s strategy, in seeking to minimise unit costs of production, is to maximise yields per hectare, to seek efﬁciencies in overall costs and to spread central overheads over as large a cultivated hectarage as possible. The group’s operations lie in an area where average rainfall levels are high. The group endeavours to capitalise on this advantage by striving to achieve economic efﬁciencies and best agricultural practice. In particular, careful attention is given to ensuring that new oil palm areas are planted with high quality seed from proven seed gardens and that all oil palm areas receive appropriate husbandry. Methane from the group’s two methane capture plants, which were commissioned in 2012, drives four generators (each of one megawatt capacity) providing power for the group’s own use. These generators have enabled the group to achieve material savings in energy costs with consumption of diesel oil for electricity largely eliminated on the REA Kaltim and SYB estates. O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 19 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 20 Strategic report Stone and coal operations Concessions Operating activities The group holds interests in respect of two stone deposits and two coal mining concessions, all of which are located in East Kalimantan in Indonesia. The stone concessions comprise a substantial deposit of high grade andesite stone located to the north east of the SYB northern plantations and a much smaller limestone deposit adjacent to the PBJ plantations. The coal mining concessions comprise a high caloriﬁc value deposit near Kota Bangun and the lower grade Liburdinding concession in the southern part of East Kalimantan. Structure Stone quarrying is classiﬁed as a mining activity for Indonesian licensing purposes and is subject to the same regulatory regime as coal mining. The group’s stone interests are therefore managed in conjunction with the group’s coal interests through an Indonesian subsidiary company, PT KCC Resources Indonesia (“KCCRI”), which is 95 per cent owned by the company’s UK subsidiary company, KCC Resources Limited, and ﬁve per cent owned by local partners. The andesite stone and coal mining concessions are held by Indonesian concession holding companies, which are currently wholly owned by the group’s local partners but with the group having the right, subject to satisfaction of certain conditions (the “applicable conditions”), to acquire 95 per cent of each of the concession holding companies at the local partners’ original cost. In the meanwhile, the concession holding companies are ﬁnanced by loan funding from the group on terms such that no dividends or other distributions or payments may be paid or made by the concession holding companies to the local partners without the prior agreement of the group. Changes to the Indonesian regulatory regime applicable to foreign investment in mining since the above arrangements were agreed are likely to mean that the applicable conditions cannot be satisﬁed in their existing form. The concession holding companies have not been consolidated, therefore, although the group is conﬁdent that such conditions could over time be successfully renegotiated without material loss to the group. In the meanwhile, in consideration of the group’s continuing support for KCCRI and all the concession holding companies, the andesite stone concession holding company has guaranteed the obligations to the group of the coal concession holding companies. The limestone concession, which is adjacent to the group’s PBJ property, is held by an independent Indonesian third party with which the group has indirectly concluded an exclusive offtake agreement as detailed below. Pursuant to arrangements agreed in respect of the limestone quarry during 2017, KCCRI purchases crushed stone from a third party contractor who quarries the stone at the concession site and then delivers it to a site within the PBJ property for crushing by the same contractor. The resultant crushed stone is currently being sold by KCCRI to PBJ but potentially could also be sold to other group companies, as well as to third parties. At the moment, the crushed stone purchased by PBJ is being utilised for hardening roads but in due course could also be used as an aggregate for other infrastructure projects. The arrangements agreed between KCCRI and the third party contractor, and between that contractor and the concession owner, provide that the contractor has exclusive rights to quarry the concession and that all stone quarried is transferred to and crushed at PBJ and then sold to KCCRI. The concession size is estimated at between 1.2 and 1.5 million tonnes although there may be scope later to extend into an adjacent area. Quarry operations commenced in May 2017 and crushing commenced in September with some 22,000 tonnes delivered to the PBJ site for road building. Pursuant to the conditional agreement for the sale of PBJ, it has been agreed that KCCRI will continue to use the existing site within PBJ for crushing stone and KLK will procure that PBJ offers KCCRI ﬁrst refusal on all future contracts for the supply of stone to PBJ. The operating licence required to establish a simple quarrying and crushing operation on the andesite stone concession was obtained in 2014. It is planned that crushed stone will be transferred from the concession site by truck to a stockpile on the REA Kaltim estates from which onward deliveries would be made to the agricultural operations and third party buyers. The agricultural operations can utilise signiﬁcant quantities of crushed stone for their building and infrastructure construction programmes. In addition, indications are encouraging that there would also be good third party demand for crushed stone for road building and use as a concrete aggregate. The group is reviewing several options for developing and operating the andesite stone concession for which suitable road access is a necessary preliminary to commencing extraction operations. A feasibility study undertaken in 2017 indicated a reduced upfront cost of opening a quarry at this concession of some $3 million and the prospect of a payback over a shorter period then previously contemplated. The group remains of the view that there is local demand for stone in the volumes that the feasibility study assumes. Discussions in respect of a joint venture arrangement are ongoing, pursuant to which a third party would operate the quarry, market the crushed stone production and provide the development funding required in exchange for a share of future proﬁts. For the moment, however, to the extent that any further capital is to be committed to its stone and coal operations, the group is giving priority to the reopening of its coal concessions, as it 20 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 21 believes that these offer greater certainty of quicker returns with lower risk than the andesite concession. The directors decided in 2012 to limit further capital commitments to the coal operations and to concentrate the group’s efforts on maximising recoveries of the amounts already invested. Then in 2014, there was a substantial fall in international coal prices and coal activities were suspended. With the recent recovery in prices the group is working towards arrangements to resume operations. Of the group’s two coal concessions, the most important is the Kota Bangun concession as this principally contains high value semi-soft coking coal which is currently in good demand. In April 2018, the group concluded arrangements with the owners of an adjacent mine to acquire an established loading point on the Mahakam River, together with a coal conveyor that crosses the group’s concession and runs to the loading point. With this acquisition concluded, the group has been able to apply for the loading point to be relicensed and for a licence to export coal from the Kota Bangun concession. As soon as these necessary permits have been obtained, dewatering can start and thereafter recommencement of mining. Meanwhile, the group is ﬁnalising arrangements to sell the existing coal stockpile at the concession of some 16,000 tonnes, utilising the loading point on the Mahakam. The group keeps under review options for the Liburdinding concession with a view to either divesting the concession in its entirety or entering into arrangements similar to those applicable to the Kota Bangun concession whereby the group would be guaranteed a minimum revenue from the concession. O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 21 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 22 Strategic report Sustainability Transparency Certiﬁcation The group is committed to operating in a responsible and transparent manner. The group has made its policy framework publicly available since early 2015 and publishes biennial sustainability reports in addition to the sustainability information published each year in the annual report. The group’s third sustainability report was published during 2017 and is available for download from the group’s website: www.rea.co.uk. This report provides updated detail regarding the group’s environmental and social performance as well as the sustainability challenges faced through 2015 and 2016, allowing stakeholders to monitor the group’s progress in meeting its sustainability commitments. The report follows the internationally recognised Global Reporting Initiative (“GRI”) standard, allowing the group’s sustainability performance to be compared with that of other oil palm growers. The group’s next sustainability report will be published in 2019. In October 2017, the group was ranked 16th out of 50 oil palm companies by the Zoological Society of London’s (“ZSL”) Sustainable Palm Oil Transparency Toolkit (“SPOTT”). This toolkit uses publicly available information regarding certiﬁcation, supply chain traceability and environmental management policies to generate a score indicating a company’s commitment to sustainability and transparency. Although the group’s ranking is lower than its previous position of 9th reﬂecting improvements in the scores of other oil palm companies, the group’s overall score has increased from 64.4 per cent (38 out of 59 points) in 2016 to 67.4 per cent (80.5 points out of 119.5 points) in 2017 moving it from the middle orange category (33-66 per cent) to the higher green category (above 66 per cent). The SPOTT criteria have changed and the number of categories has increased from 7 to 10, complicating comparison of current and previous rankings. Policies The group continues to follow the policy framework implemented in early 2015, which incorporates the requirements of all of the sustainability standards and regulations to which the group has committed. Together these policies reinforce the group’s commitment to well-established best practices, including sustainable development through the provision of socio-economic beneﬁts for local communities, the protection of biodiversity and ecosystem functions, zero- burning, reducing greenhouse gas emissions and a zero-tolerance approach to bribery and slavery. The policy framework was updated in 2017 to include a statement detailing the group’s stance against modern slavery, in line with the UK’s Modern Slavery Act 2015. The policy framework can be downloaded from the group’s website at www.rea.co.uk/sustainability/policies. Certiﬁcation of the oil palm industry, preferably by multiple certiﬁcation schemes, provides third-party veriﬁcation that a company is operating according to national and international standards. Further, it encourages improvement of practices across the industry by establishing higher premia for certiﬁed products. The group remains committed to ensuring that all of its plantations and mills achieve and maintain, amongst others, Roundtable for Sustainable Palm Oil (“RSPO”) certiﬁcation, International Sustainability and Carbon Certiﬁcation (“ISCC”) and Indonesian Sustainable Palm Oil (“ISPO”) certiﬁcation. RSPO The group has been a member of the RSPO since 2007. REA Kaltim’s two oldest oil mills, Perdana oil mill (“POM”) and Cakra oil mill (“COM”), were ﬁrst certiﬁed in 2011 along with their supply chains. Each year since, these mills and their supply chains have undergone assessments to monitor their continued compliance with the RSPO standard. In 2016, POM, COM, the COM kernel crushing plant ("KCP") and their supply chains along with the group’s downstream bulking station successfully underwent full recertiﬁcation audits, which are required every ﬁve years. In April 2017, POM, the KCP at COM and the bulking station duly passed their annual surveillance 1 audits. The annual surveillance 1 audit for COM is due to be completed in May 2018. In November 2017, the Certiﬁcation Body SCCS awarded the group’s third oil mill at Satria (“SOM”) RSPO certiﬁcation for its mill and KCP. Subsequently, there was a change in the regulations whereby a mill is no longer eligible for certiﬁcation unless the estates that supply the mill are also certiﬁed in accordance with the RSPO principles and criteria. This led to the SOM certiﬁcation being rescinded pending certiﬁcation of the Satria estate that supplies it. SOM’s KCP, on the other hand, has retained its certiﬁcation. As previously reported, there remains an outstanding High Conservation Value (“HCV”) compensation liability at Satria estate regarding a small area of land that was cleared in 2008 prior to conducting an HCV assessment. A compensation plan was submitted to the RSPO in 2016, including a proposal of how the group intends to compensate for the cleared land but acceptance of this plan has been delayed by the need to clarify the precise extent and location of the land in question. Once the RSPO has agreed the position, SOM and its supply chain will undergo an RSPO audit. It is hoped to resolve the compensation liability during 2018. A second HCV compensation liability is outstanding for approximately 959 hectares of land cleared at CDM. Although there is no mill at CDM, a compensation plan has been submitted to the RSPO in furtherance of the group’s commitment to achieve full RSPO certiﬁcation for all of its operations. RSPO has responded positively to the objectives, 22 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 23 timeline and proposed compensation set out in the plan and, once implementation has been agreed, the compensation payments will be settled over several years. ISCC CPO produced from ISCC certiﬁed mills can be sold for the production of biodiesel that meets the requirements of the European Union Renewable Energy Directive (“EU RED”). In 2017, all three of the group’s mills passed the recertiﬁcation audits and new ISCC certiﬁcates were issued for COM in March, POM in June and SOM in July 2017. ISPO It is mandatory for oil palm companies operating in Indonesia to acquire ISPO certiﬁcation. REA Kaltim successfully achieved ISPO certiﬁcation in 2016 and passed audit surveillance tests in 2017. SYB has not yet obtained ISPO certiﬁcation, as the land application permit for the palm oil mill efﬂuent (“POME”) treatment facility, for which an application was submitted to the district level of the Department of Environment in October 2016, is still pending. Recommendation letters have now been issued and submitted to the certiﬁcation body at ISPO and the permit is expected to be issued shortly. Certiﬁed sales Production and sales of certiﬁed CPO and CPKO are shown below: Tonnes CPO CPKO CPO CPKO 2017 Production 2017 Sales RSPO certified 10,133 3,446 – 3,001 ISCC certified 81,738 – 62,566 – Other 52,045 7,606 81,632 8,802 Total 143,916 11,052 144,198 11,803 In making sales of CPO that is both RSPO and ISCC certiﬁed, the group has to decide which certiﬁcation should apply to each sale. The reason that little CPO and CPKO is sold under RSPO certiﬁcation is that, in the context of the overall market for such oils, the group’s monthly production is relatively small which makes the logistics of ﬁnding a suitable buyer challenging. Instead, the group uses the RSPO “PalmTrace” system whereby physical sales and processing activities of certiﬁed palm oil and palm kernel oil can be registered. RSPO PalmTrace also offers a marketplace and the option to register off market deals (“Book and Claim”) for RSPO “credits” which conﬁrm that the certiﬁed palm oil was produced by an RSPO- certiﬁed company. O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Environment The group maintains ISO 14001:2004 Environment Management System certiﬁcation for its operations. POM and COM acquired this certiﬁcation in May 2015 while the REA Kaltim estates, SOM and the SYB estates achieved certiﬁcation in February 2016. The certiﬁcations will be due for renewal in, respectively, May and September 2018. The group’s mills have also been rated, at both provincial and national levels, under PROPER, the “Program for Pollution Control Evaluation and Rating”. The ratings attained by the group’s mills in 2017 are shown below, where blue denotes environmental management standards that are in accordance with the regulations and green denotes environmental management that is higher than the standard requirement. The green awards at provincial level reﬂect the provision of energy to local communities through biogas production. National Provincial POM Blue Green COM Blue Green SOM (awaiting POME permit) Blue 2017 is the seventh year for which the company has calculated and reported its carbon footprint using RSPO’s PalmGHG calculation tools. For the last two years, the company has applied RSPO PalmGHG calculator v. 3.0.1. Changes in the calculation methodologies have led to some discrepancies between current and previous GHG emission calculations. With the reduction in land clearing during 2017 compared with 2016, the related CO2 emissions were also reduced, while the increased oil palm hectarage in 2017 meant that there was more sequestration of greenhouse gases by the oil palm plantings. As a result, when improvements in POME treatment, lower fuel usage for transport and storage and improved cultivation by smallholders are also taken into account, total carbon emissions in 2017 are estimated to have been lower than in 2016. Responsible agricultural practices The quality of river water, tap water and air quality across the group’s plantations and employee facilities is measured regularly. Maintaining fresh water resources is vitally important for the group’s operations, both for use in the mills and for the provision of clean water for homes in the group villages. The group’s mills operate a zero-efﬂuence policy, whereby no by-products resulting from the production of CPO or CPKO are expelled into local water courses. A substantial proportion of the POME that is produced at POM and COM is diverted to the methane capture facilities at each mill to be used in generating renewable energy. POME that is not used for methane production, as well as POME R.E.A. Holdings plc Annual Report and Accounts 2017 23 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 24 Strategic report Sustainability continued produced at SOM and the digested POME residue of methane production is treated in the traditional manner by being pumped through a series of open ponds to reduce its biological oxygen demand (“BOD”) and then used for land application in ﬂat beds between rows of oil palm, allowing the remaining nutrient content to be used as a fertiliser. The BOD of the POME in the ﬁnal open pond at each mill is tested on a monthly basis by a third party to ensure that it is below the legal limit for land application in Indonesia. All three mills continued to meet this standard in 2017. The group seeks to optimise the quantity of organic and inorganic fertiliser that it applies and supplements inorganic applications with organic fertiliser so as to maximise the use of the empty fruit bunches (“EFB”) discarded by the mills. Having ceased composting operations in 2016, as these were found to have become less effective in terms of nutrient production now that the majority of POME is directed to the biogas facilities, the group has reverted to the application of EFB for mulching. This provides the palms with organic matter that helps to retain ground moisture which is important during dry weather periods and also helps to minimise the application of inorganic fertiliser. The group’s inorganic fertiliser regime is designed by independent agronomy consultants, based on analysis of the nutrient content of systematically selected oil palm frond samples, supplemented by visual inspection of palm canopies and soil sampling. In 2015, it became evident that too little fertiliser was being applied resulting in a nutrient deﬁciency in the soils and palms and, as a consequence, lower FFB productivity. The impact of the reduced application and uptake of inorganic fertiliser was exacerbated by the prolonged droughts during 2015 and 2016 as moisture is required to mobilise the nutrients in the fertiliser to make them available to the palms. Fertiliser application during drought conditions is both costly and a waste of resources. Increased quantities of fertiliser were applied during the second half of 2016 when wetter conditions helped to boost the nutrient supply base and improve FFB yields. In order to restore the nutrient content of the soils and to maximise productivity, the quantity of inorganic fertiliser in each of 2016 and 2017 was approximately double that applied in 2015. Every effort is taken to prevent POME polluting water courses or neighbouring land. After three incidents in 2016 as a consequence of prolonged periods of rainfall causing the POME ponds or ﬂat beds to overﬂow, the group constructed bunds around the POME trenches thereby preventing overﬂows into neighbouring community land in 2017. Prolonged periods of rainfall and upcoming groundwater, however, did cause high pressure and some seepage in the ponds at POM and SOM. This has been contained by strengthening the bunds and further work to improve the bunds around the ponds is continuing in 2018, together with the construction of additional trenches to prevent overﬂowing in the future. Further staff training was conducted in 2017 to improve the knowledge and understanding of land application techniques and emergency response procedures in the event of overﬂows. The higher rainfall experienced in 2017 helped to prevent further outbreaks of pests that were witnessed in 2016. Employees At the end of 2017, the group’s workforce numbered 10,958 compared to 8,372 at the end of 2016. The increase in headcount was due to the recruitment of additional harvesters and casual workers in the second half of the year to meet the increasing volume of FFB. To improve productivity, the group aims to ensure that employees at every level within the organisation are rewarded based on their performance. Performance from assistant to director level is evaluated annually in relation to a pre-agreed set of quantitative and objective key performance indicators (“KPIs”). The reward system is under regular review and is subject to change if more effective methods for improving productivity are found. In 2017, a new system of compensation and beneﬁts was implemented for harvesters whereby monthly production incentives are now paid based on the number of days in a month in which the quantity of FFB harvested by an individual exceeds a set minimum level. The more days that a harvester exceeds the minimum level, the greater the monthly incentive. A quarterly bonus is also awarded to the two most productive harvesters at each estate as an additional incentive. This system replaced the previous scheme. The introduction of the new compensation package has led to a marked improvement in harvester productivity. The group endeavours to provide competitive salary packages, opportunities for career development and a decent standard of living on the estates for employees and their families. This is particularly important given the remote location of the group’s estates. Good quality housing and community facilities for employees are a priority. The group continues to build houses using bataco blocks, which are produced in-house by mixing boiler ash from the mills with cement. Use of this material has signiﬁcantly reduced both the cost and environmental footprint of new houses. The group also provides each village emplacement with a medical clinic, church, mosque, sports facilities and a market. In 2008, the group established a foundation to manage the network of schools across the estates. The foundation now manages 28 schools, including 13 pre-schools, 14 primary schools and one secondary school. At the end of 2017, 433 pre-school children, 1,793 primary school children and 202 secondary school students were enrolled in the group’s school system. 24 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 25 In order for the group’s operations to run efﬁciently, good management is essential. The group aims to achieve this by facilitating the upward mobility of promising employees and by recruiting and training new graduates. The mechanism for this is the group’s long established cadet training programme. The programme is run from the group’s central training school and provides participants with 12 months of theoretical and practical training in all aspects of plantation management. Cadets who successfully complete the training are appointed as assistants on the group’s estates, in the mills and various other departments. Over the last 11 years, 269 cadets have participated in this programme and almost 70 per cent are still employed by the group. 10 people enrolled in the 2016/2017 programme, all of whom successfully graduated and progressed to positions at the group’s mills, the established and developing estates, the plasma projects and the conservation department. Career advancement is not restricted to members of the cadet training programme. To equip employees at every level with the skills and knowledge to perform effectively and to advance their careers, the group also runs an annual training programme. The programme is designed by the group’s training manager, based on input received from every department, and consists of both in-house training and participation in external training and conferences. The group takes seriously its duty to protect and respect the human rights of any person affected by its operations and is committed to adhering to the core conventions of the International Labour Organisation’s Fundamental Principles and Rights at Work, as well as Indonesian labour regulations and the provisions of the Modern Slavery Act 2015. The policy on human rights is displayed at every work site in order to communicate the group’s commitments in this regard to employees at every level. This policy includes a commitment to promote diversity and equality in the workplace and states clearly that discrimination based on age, disability, ethnicity, gender, marital status, political opinion, race, religion or sexual orientation will not be tolerated. As at 31 December 2017, 37 ethnicities and 5 religions were represented in the group’s workforce. The group pays careful attention to the gender balance within its workforce. At the end of 2017, women accounted for 29 per cent of the group’s workforce, including 18 per cent of the management team. 2017 2016 Number of Number of Number of Number of male staff female staff male staff female staff Directors 4 2 5 1 Management 66 13 61 12 Rest of workforce 7,670 3,214 6,007 2,298 Total 7,729 3,229 6,061 2,311 Management Overall responsibility for the group’s operations resides with the group managing director, who is based in the UK. The president director of the group’s principal operating subsidiary, REA Kaltim, together with 4 fellow directors has overall local responsibility for the group’s affairs in Indonesia, covering the estate operations, corporate affairs, commercial administration and ﬁnance. Day to day execution of the REA Kaltim board’s executive responsibilities is undertaken by a small team of senior managers in Indonesia together with the group’s chief ﬁnancial ofﬁcer and regional secretary, both of whom are based in Singapore but spend a substantial proportion of their time in Indonesia acting on behalf of the group’s board to assist in ensuring consistency and cohesion between London and Indonesia. The directors believe that basing senior management in the same time zone as the group’s operations facilitates management oversight and improves its effectiveness. As a foreign investor in Indonesia, the group is conscious that it is in essence a guest in Indonesia and an understanding of local customs and sensitivities is important. The group’s ability to rely on senior Indonesian staff to handle its local interface is therefore a signiﬁcant asset upon which the group continues to build. This asset is augmented by the support and advice that the group obtains from local advisers and from the local non-controlling investors in, and local commissioners of, the company’s Indonesian subsidiaries. Whilst a number of executive functions have, over the past few years, been successfully transferred from the UK to Singapore and Indonesia, the group has concluded that it is important to maintain separation between the responsibilities of the group managing director and the person in overall charge of the group’s Indonesian operations and, accordingly, the managing director will remain based in the UK for the foreseeable future. Health and safety The group remains committed to implementing the internationally recognised Operational Health and Safety Management System (“OHSAS”) 18001. Monthly inspections of the group’s mills, estates and biogas facilities are undertaken to ensure planned health and safety measures are implemented in order to meet the criteria for OHSAS 18001 certiﬁcation. Regular training sessions are conducted to instil the importance of safe working practices into all employees and contractors. Routine training sessions include the appropriate use of protective equipment, ﬁrst aid, ﬁre safety and risk management for high risk tasks (working at height, in conﬁned spaces, with chemicals or high voltage). An emergency response team has been established with training courses O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 25 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 26 Strategic report Sustainability continued conducted for ﬁres, responding to chemical spills, explosions and riots. Roads in the region of the group’s operations can be hazardous, particularly after heavy rain, therefore drivers of all vehicles are required to pass a company-set driving test and motorcycle safety training is provided for employees and members of their families. Despite regular and routine training, it takes time for health and safety practices to become fully embedded in workforce practices. An internal audit for OHSAS 180001 and for the Indonesian certiﬁcation system, based on Indonesian government regulation 50/2012, was conducted during 2017 and determined that the target for obtaining both OHSAS 18001 and Occupational Health & Safety Management System certiﬁcation should again be postponed until the end of 2018. Although measures are taken to minimise the occurrence and severity of accidents, incidents still occur. In 2017 there were 872 Lost Time Incidents (“LTIs”) compared to 649 LTIs in 2016. However, man-hours in 2017 were 24,934,348 compared to 17,301,932 man-hours in 2016, so relative to total man-hours there was a 6.8 per cent reduction in LTIs. Regretfully there were two fatalities between September and December 2017. Of these, one was work related and the other one was non work-related. The group treats any fatality within its premises extremely seriously and responds in the same way irrespective of whether the incident is considered to be work-related or not. The group maintains a rigorous incident investigation and reporting procedure to ensure that the cause of any incident is properly identiﬁed and that the senior management operations teams understand the remedial action required. External healthcare provision is extremely limited in the remote locations of the group’s operations. The group has established a network of 16 clinics, which treat employees, their families and also members of the local communities. In the last quarter of 2017, the group appointed a new chief medical ofﬁcer and one permanent dentist, so medical care is now provided by two doctors, a dentist and a team of paramedics and midwives. The medical team conducts a monthly immunisation programme for families, including collaborations with external medical professionals to participate in the Indonesian government’s polio immunisation programme. The medical team also conducts blood and lung tests twice a year to check for chemical exposure in workers who come into regular contact with pesticides. If workers test positive for pesticide exposure, they are rotated out of spraying and into other roles. There are also audiometry and ergonomic tests for certain workers. As a precautionary measure, drugs tests are taken once a year to try to prevent drug usage and addiction amongst employees. Community relations The group aims to develop and maintain good relationships with the people that are impacted by its operations. Successful relationship building with surrounding communities is seen as key to the group’s ability to operate efﬁciently and reduce the frequency of compensation claims by villages. Relationships with local communities have improved over the last few years through regular formal and informal engagement with a wide variety of village groups and representatives, as well as a transparent approach to resolving claims of outstanding rights to compensation for land through the group’s department of village affairs (“DVA”). In 2017, 27 land rights claims were made against the group for a total area of some 624 hectares, a signiﬁcant reduction from the 70 claims over 1,572 hectares of land experienced in 2016, most of which are being successfully resolved or have been found to be spurious. Community development Over the last 20 years the group has endeavoured to ensure that its business contributes to improvement in the socio- economic status of the communities that live in the vicinity of its operations. What began as a primarily philanthropic approach has evolved into established schemes designed to ensure that local communities share in the beneﬁts generated by the group’s operations. The core principle is to clarify where communities need support in order for them to be and remain self-sufﬁcient in their food and energy supplies and in their commercial activities. The group collaborates with the communities in such a way that they can beneﬁt from the group’s operations without being dependent upon them. Initiatives developed to achieve this include maximising employment opportunities for local people, supporting and improving local businesses, expanding smallholder schemes and investing in infrastructure projects that will catalyse further development. Many of these initiatives work in tandem with local government programmes. Renewable energy generated by the group was provided to 26 villages, comprising approximately 13,000 households, through the infrastructure established by PLN. PLN connects villages to the electricity supplied by the group which it purchases from the group at a price of $0.07 per kilowatt hour. The beneﬁts to local communities from this project are substantial. Prior to the establishment of this energy scheme, villages relied on diesel-powered generators for their electricity supply. The switch to methane-generated electricity not only provides communities with a cheaper, lower emission and renewable energy source, but also allows them to be more independent from the group as they no longer rely on donations of diesel from the group to run their generators. During 2017, PLN continued its work of providing electricity installations for the residents of local villages not yet connected to the supply. Some further installation work remains to be completed in 2018. 26 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 27 In 2017, the group completed the installation of a further two new water treatment facilities, in addition to the ﬁve water treatment facilities that were already established by the end of 2016, providing the local communities in three additional villages with access to clean water. The group’s community development department provides training for the treatment plant operators to encourage independence from the group in recognition of the importance of each local village having control of the management and maintenance of its own resources. Plasma schemes differ from PPMD in their ﬁnancing and management. Plasma schemes established to date have been ﬁnanced by loans to the cooperatives from the group and local development banks. The cooperatives themselves are not responsible for, or involved in, the management of the plasma plantations but rather the group manages these areas in return for a pre-agreed management fee. The cooperatives, therefore, receive an income based on the value of FFB harvested minus loan repayments and management fees in accordance with government regulations. DVA conducts a mentoring scheme for small businesses and households, making routine visits to local communities to provide advice to farmers on improving their yields and minimising the environmental impact of their practices. Sessions are also conducted on how to manage household ﬁnances and loans. In collaboration with local government and neighbouring companies, the group seeks to improve the infrastructure around villages and provides donations in the form of equipment, expertise or money where necessary to support villages in improving their own roads, schools and other community facilities. The group also works with the local university and the Training Center for Agriculture and Rural Support to enhance mutual understanding and cooperation. Other community support is provided in the form of assistance with the organisation of women’s groups and various youth activities in local villages, including sports competitions, history classes, scouting and social activities. Smallholders Developing smallholder schemes and purchasing FFB from independent smallholders not only creates mutually beneﬁcial business relationships, but also results in ﬁnancial beneﬁts for local communities, and increases employment and opportunities to educate local farmers in more sustainable agricultural practices. The group engages with smallholders in three ways: through a programme known as “Program Pemberdayaan Masyarakyat Desa” (“PPMD”), through “plasma” schemes and by purchasing FFB directly from independent smallholders. The group has been working with smallholders since 2001 under the ‘Smallholder Farmers Program’ which became the PPMD programme in 2005. Under this scheme, the group assisted cooperatives of local people with access to land to cultivate oil palm by providing them with oil palm seedlings, fertilisers, herbicides and technical assistance. The costs of the inputs provided are repaid by the members of these cooperatives, interest free, through deductions made when their FFB is sold to the group’s palm oil mills. Plasma smallholder schemes are established for the beneﬁt of the communities that are surrounding the company plantations, as part of the group’s obligation to responsible development of new land for oil palm, in accordance with regulations introduced by the Indonesian government in 2007. The development of oil palm plantations under the plasma development programme can take longer to organise than the development of PPMD or group-owned estates, due to the more complex nature of the funding, legal aspects and management of these areas. It is critical that, before development begins, members of each cooperative fully understand how plasma schemes work, including the cost of cultivating oil palm, the terms of the ﬁnancial agreements with the group or bankers to the schemes and the predicted income over time to the members of each cooperative. The plasma schemes at the group’s established estates are not required under the 2007 government legislation as these estates were developed prior to 2007, but in the interests of equitable treatment, the group has committed to develop plasma cooperatives for villages whose land overlaps with the group’s location permit obtained from the government. By the end of 2017, 4,744 hectares of plasma has been developed, compared with 3,567 hectares at the end of 2016. Since 2015, FFB has only been accepted from independent smallholders who have participated in the group’s smallholder mapping process. The aim of this process is to create a map and a comprehensive database of all smallholder land within the group’s supply base in order to ensure traceability of the FFB supply chain. The volume of FFB purchased by the group is veriﬁed against the farmer’s registered details. Traceability of fruit purchased from smallholders to a speciﬁc farmer and plot of oil palm is critical to the group’s ability to improve practices among its suppliers. The group remains committed to achieving RSPO certiﬁcation for independent smallholders that make up part of the supply base and in 2017 conducted cultivation technical training and accounting training in order to improve the practices of both PPMD cooperatives and independent smallholders. Further speciﬁc training is planned for 2018 and 2019. During 2017, the group collaborated with 18 PPMD cooperatives, 8 plasma cooperatives and 8 independent smallholder cooperatives. Together they accounted for some 17 per cent of the FFB processed in the group’s mills and received revenue equivalent to some $14.4 million. O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 27 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 28 Strategic report Sustainability continued FFB purchased (tonnes) 2017 2016 Plasma 12,179 9,986 PPMD 91,822 80,666 Independent smallholders 10,004 7,399 Total 114,005 98,052 Revenue ($ million) 14.4 10.4 maintain and enhance biodiversity surveys, in cooperation with local and international scientists, including HCV boundary marking and monitoring, camera trapping point surveys, belt- transects, restoration and enrichment activities and conservation education in schools. REA Kon also conducts water quality monitoring to obtain a reliable picture of the physical and biological health of conservation areas. Conservation Plantation development in the tropics can result in a signiﬁcant alteration of biodiversity and natural ecosystem functions. Agricultural operations should ensure for the long term the effectiveness of natural ecosystem characteristics and services. Ideally, the operational aspects required for oil palm cultivation, harvest, processing and delivery should be integrated with conservation principles, not only with measures in place to avoid or mitigate negative impacts, but also with positive steps to restore or enhance signiﬁcant portions of the original landscape level biological diversity. Aware of the importance of minimising the environmental impact of its operations, the group incorporated a strategy for enhanced best practice, within the policy framework adopted at the beginning of 2015. This was to ensure that all those involved in the process of planning and development of new land were aware of the responsibility to prevent or mitigate negative impacts of plantation development. As dictated by the group’s policy and the RSPO’s new planting procedure on which the group’s policy is based, the process of opening new land begins with a series of surveys and assessments typically conducted by qualiﬁed experts. These environmental and social impact assessments include an evaluation of land use changes, assessments of high conservation value (“HCV”) characteristics of the landscape, soil surveys and carbon stock assessments. The results of these assessments guide development teams to avoid disturbance of areas of cultural biological signiﬁcance, steep areas, riparian zones or peat soils, including any habitats containing high carbon stock. The area designated as conservation reserves within the group’s titled land bank totals approximately 20,000 hectares, accounting for some 23 per cent of the group’s titled areas. Since 2008, this network of conservation reserves has been managed by the REA Kaltim conservation department, known as REA Kon, an in-house team of experienced conservationists, ecologists, herpetologists, ornithologists and education and media specialists with good knowledge of the biological and cultural diversity of the region. Using empirical information derived from scientiﬁc ﬁeld studies, hands-on conservation education and active management, REA Kon’s aim is to conserve or enhance the natural biodiversity and ecosystem functions of the landscape in which the group operates. REA Kon conducts systematic monthly activities in order to 28 R.E.A. Holdings plc Annual Report and Accounts 2017 In 2017, a total of 19 new camera traps were installed in REA Kaltim and CDM. These camera traps recorded a total of 34 mammal, bird and reptile species. Three of these species are threatened: Pongo pygmaeus (Orangutan) (Endangered), Manis javanica (Sunda Pangolin, Trenggiling) (Critically endangered) and Helarctos malayanus (Malayan Sun Bear, Beruang Madu) (Endangered). The Prionailurus bengalensis or leopard cat (Kucing Hutan) was also detected in 2017. REA Kon monitors the orangutans found in the conservation areas of four of the group’s estates on a monthly basis by conducting nest surveys along permanent transects. In 2017, monthly permanent transect walks revealed a total of 94 orangutan nests which had remained intact for a total of 652 days, implying that, on average, each nest remained intact for about 7 days. These transects conﬁrm that a population of orangutans continues to use the conservation reserves within the group’s concessions. Further surveys that focus on identifying orangutan individuals will be undertaken during 2018 and 2019 to verify the current status of the orangutan population. An important aspect of REA KON’s work to protect the habitat and biodiversity within conservation areas is regular engagement with surrounding communities and REA’s workforce. Frequent engagement allows REA Kon to exchange ideas with local communities and workers about its efforts to maintain local biodiversity and natural ecosystem services. REA Kon also seeks to form closer bonds and better communication with local villages and independent farmers. In 2017, REA Kon conducted regular visits to schools in REA emplacements as well as educational activities with communities and workers, mostly in the form of presentations, followed by discussions, about rare, threatened and endangered species. A conservation education camp was organised in the ﬁeld station to provide more hands-on learning about environmental issues for a broader age group from within the local community. REA Kon also conducts visits to villages to meet senior members of communities to promote positive environmental action by villages, including HCV protection and proper waste management. REA Kon often conducts these visits in collaboration with the Indonesian Government’s Natural Resources Conservation Agency. Education can help to promote a positive attitude towards conservation amongst local communities and the workforce, 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 29 but the message needs to be reinforced through the active management of conservation areas. The boundaries of conservation areas are marked with visible posts and signboards to clearly delineate HCV land within the group’s concessions and REA Kon routinely patrols the edges of the conservation areas to monitor for signs of human disturbance and to map areas damaged through human activity or ﬁre. Despite REA Kon’s continued engagement with local communities, there are still cases of encroachment into the group’s conservation areas by loggers or independent farmers. Rough analyses of satellite-based land cover maps have revealed that there has been much vegetation change in the conservation areas over the past decade, suggesting potential clearing in some areas and potential regrowth in others. The group is now analysing the changes to the quality and extent of forested areas with the use of recent high-resolution land cover maps. Managing the encroachment of conservation reserves is arguably the greatest sustainability challenge faced by the group. The problem is exacerbated by Indonesia’s complicated land rights system. A standard operating procedure has been developed to ensure that the plantation, conservation, village affairs and security teams fully understand their respective responsibilities in tackling encroachment and can respond quickly and effectively if logging or land clearing is detected within the conservation reserves. When an area of encroachment is reported by plantation teams or found during patrols, REA Kon visits the location to determine the extent of the affected area, the person or group responsible and the existence of any legal or customary rights. The matter is then passed to DVA, which is responsible for determining whether a case requires compensation or prosecution and for proceeding with the appropriate action. In addition to gathering information regarding each case of encroachment, REA Kon also assesses the risk of further encroachment for each area and establishes the ecological, social and legal feasibility of restoring the natural vegetation as well as the cost of doing so. Based on this information, REA Kon develops an action plan for each location where encroachment has occurred. REA Kon manages a nursery area of native species for the purpose of restoring the natural vegetation, but whilst it would be ideal to restore all locations with natural vegetation, the group’s ability to do so depends on obtaining the free, prior and informed consent of any legitimate legal or customary land use rights holders to change the use of these areas. To protect the conservation areas set-aside in newer developments, all legal and customary land use rights to the conservation reserves are identiﬁed and acquired in the same way as for the land designated for oil palm cultivation. The group acknowledges the importance of free, prior and informed consent for conservation and, although this was not the group’s policy when the group’s REA Kaltim and SYB estates were developed some years ago, adhering to this policy going forward should facilitate the group’s ability to prevent and address any clearance of future reserves. With ample rainfall during 2017, there were no forest ﬁres recorded in the region. Camera trap photo from KMS conservation reserve 2015 Company birthday celebrations 2014 O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 29 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 30 Strategic report Finance Accounting policies The group and the company continue to report in accordance with International Financial Reporting Standards (“IFRS”) and to present their ﬁnancial statements in dollars. The signiﬁcant change in accounting policy adopted last year in accordance with the amendment of IAS 41 Agriculture effective 1 January 2016 has been continued, with bearer plants accounted for as property, plant and equipment. This policy continues to affect the reported losses for 2017 and 2016 by both including a charge for depreciation of bearer plants (which were formerly treated as biological assets) and also not including a movement in the fair value of bearer plants, which would tend to be an uplift reﬂecting the expansion of the group’s hectarage or planted hectarage, as was the case in every year that the former IAS 41 Agriculture applied. One small change to accounting policies in 2017 is that the group has ceased to amortise its land titles. This reﬂects the expectation of the directors, having reviewed the relevant Indonesian legislation, that there would be no difﬁculty in renewing the “hak guna usaha” (“HGU”) titles to land in the future. This is consistent with the approach and expectation of other oil palm groups. The amount of amortisation provided on land titles in 2016 was $432,000. Group results Group revenue, operating loss and loss before tax for 2017, with comparative ﬁgures for 2016, were as follows: 2016 $’m $’m 2017 Revenue 100.2 79.3 Operating loss (2.2) (5.0) Loss before tax (21.9) (9.3) The signiﬁcant increase in revenue in 2017 reﬂected the higher crop harvested during the year and an improvement in the selling prices achieved for the group’s CPO and CPKO. The increase was in part offset by an increase in cost of sales reﬂecting the remedial actions taken during the year to restore the conditions of the mature estates, of which the full beneﬁt will only accrue in 2018 and later years, and the higher prices paid for third party FFB. The signiﬁcant adverse movement on loss before tax as compared with 2016 ($21.9 million against $9.3 million) principally arose from the change in the value of the group’s sterling notes arising from exchange ﬂuctuations resulting in a charge of $4.8 million in 2017 contrasting with a credit of $10.5 million in 2016. Cost of sales reported for 2017, with comparative ﬁgures for 2016, was made up as follows: 30 R.E.A. Holdings plc Annual Report and Accounts 2017 2016 $’m $’m 2017 Depreciation and amortisation 22.2 21.0 Purchase of external FFB 14.4 9.1 Estate operating costs 49.7 41.7 86.3 71.8 The valuation of closing agricultural produce inventory at the end of 2017 at lower prices than at 31 December 2016 resulted in a negative movement on such inventory of $1.1 million (2016: $0.6 million gain). Administrative expenses amounted to $13.7 million in 2017, compared to $12.0 million in 2016. A number of one off costs were incurred during the year including staff retrenchment costs arising from the combination in Balikpapan of the group’s former Indonesian ofﬁces in Samarinda and Jakarta as well as costs arising from changes to senior management. Investment revenues were $1.1 million against $1.7 million in 2016. The latter ﬁgure beneﬁted from the inclusion of interest of $1.1 million received in respect of tax amounts refunded as a result of Jakarta Tax Court decisions. Finance costs totalled $20.8 million (2016: $6.0 million), the difference principally reﬂecting the change in the value of the group’s sterling notes arising from exchange ﬂuctuations with a charge of $4.8 million in 2017 compared to a credit of $10.5 million in 2016. The taxation charge on the loss before tax amounted in 2017 to $3.0 million against $2.0 million in 2016. Two principal factors have adversely affected this charge in 2017. First, regulations in Indonesia limit interest deductions for tax purposes in circumstances where the equity in an entity is small by comparison with interest bearing borrowings. Following the anticipated sale later in the year of the group’s holding in PBJ, reorganisation of Indonesian subsidiary capital structures should mitigate the negative impact of these regulations in future. Secondly, the tax losses in Indonesia, which can only be carried forward for a maximum of ﬁve years, have been reviewed and partly written down to reﬂect revised anticipated utilisation. The directors continue to plan the establishment of a target for long term average return on equity once group proﬁtability has been restored. The negative return for 2017 was 16.1 per cent (2016: negative 7.6 per cent). 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 31 Dividends The ﬁxed semi-annual dividends on the 9 per cent cumulative preference shares that fell due on 30 June and 31 December were duly paid. In view of the results reported for 2017, the directors have concluded that they should not declare or recommend the payment of any dividend on the ordinary shares in respect of 2017. Capital structure The group is ﬁnanced by a combination of debt and shareholder funds. Total shareholder funds less non- controlling interests at 31 December 2017 amounted to $259.1 million as compared with $286.7 million at 31 December 2016. Non-controlling interests at 31 December 2017 amounted to $17.6 million (2016: $22.8 million). Completion during 2017 of arrangements agreed in 2016 with PT Dharma Satya Nusantara (“DSN”) for the acquisition by DSN of a 15 per cent minority interest in REA Kaltim, resulted in the receipt by the group during 2017 of additional loans from DSN of $11.7 million and £3.9 million and an additional payment by DSN for its 15 per cent interest in REA Kaltim of $807,000. In addition, the group raised monies during 2017 from the sale of 7.5 per cent dollar notes 2022 (“2022 dollar notes”) held in treasury at end 2016 and an issue of 9 per cent cumulative preference shares of £1 each (“preference shares”). $7.2 million of 2022 dollar notes were sold during the year for a consideration of $7.1 million while in October 2017 8,358,768 preference shares were issued, fully paid, by way of placing at par plus accrued dividend for a total consideration equivalent to $11,398,000. On 30 June 2017 the company repaid all of the outstanding $20.2 million nominal of 7.5 per cent dollar notes 2017 (“2017 dollar notes”) at par plus accrued interest. This was followed in October and December 2017 by the purchase by the company for cancellation of £298,000 nominal of the 9.5 per cent guaranteed 2015/17 sterling notes (“2017 sterling notes”) issued by a wholly owned subsidiary of the company. The outstanding balance of £8.0 million nominal of the 2017 sterling notes were then repaid on 21 December 2017 at par plus accrued interest. Revolving working capital facilities of the Indonesian rupiah equivalent of $19.9 million provided by the group’s principal Indonesian bankers, PT Bank DBS Indonesia (“DBS”), were rolled over for a further twelve months at the end of July 2017. Following these transactions, group indebtedness at 31 December 2017 amounted to $220.0 million against which the group held cash, cash equivalents and investments of $8.3 million. The composition of the resultant net indebtedness of $211.7 million was as follows: $’m 7.5 per cent dollar notes 2022 (“2022 dollar notes”) ($24.0 million nominal) 23.6 8.75 per cent guaranteed sterling notes 2020 (“2020 sterling notes”) (£31.9 million nominal) 41.4 Loans from non-controlling shareholder 29.9 Indonesian term bank loans 72.1 Drawings under working capital lines 53.0 220.0 Cash and cash equivalents (5.6) Investments (2022 dollar notes held in treasury) (2.7) Net indebtedness 211.7 The group has no material contingent indebtedness save that, in connection with the development of oil palm plantings owned by village cooperatives and managed by the group, the group has, as noted under “Smallholder schemes” in “Sustainability” above, guaranteed the bank borrowings of the cooperatives concerned. The outstanding balance of these at 31 December 2017 was equivalent to $8.1 million. The 2022 dollar notes are unsecured obligations of the company and are repayable in a single instalment on 30 June 2022. The sterling notes are issued by REA Finance B.V., a wholly owned subsidiary of the company, are guaranteed by the company and REA Services Limited (a wholly owned UK subsidiary of the company) (“REAS”), and are secured almost wholly on unsecured loans made by REAS to Indonesian plantation operating subsidiaries of the company. The 2020 sterling notes are repayable in a single instalment on 31 August 2020. Indonesian bank borrowings at 31 December 2017 comprised Indonesian rupiah denominated amortising term loans and working capital loans to each of REA Kaltim, SYB, PBJ and KMS. The REA Kaltim loans are provided by DBS, are secured on certain assets of REA Kaltim and are guaranteed by the company. The outstanding balance of such loans at 31 December 2017 was the equivalent of $70.3 million comprising term loans of $23.0 million and working capital loans of $47.3 million. The term loans are repayable as follows: 2018: $3.4 million, 2019: $6.5 million and thereafter $13.1 million. The working capital loans fall due for renewal in 2018 ($16.3 million) and 2019 ($31.0 million). The SYB loans are also provided by DBS, are secured on certain assets of SYB and are guaranteed jointly by the company and REA Kaltim. The outstanding balance of the loans at 31 December 2017 was the equivalent of $14.9 million, comprising a term loan of $9.2 million and a working capital loan of $5.7 million. The term loan is repayable as follows: 2018: $1.4 million, 2019: $2.6 million and thereafter $5.2 million. The working capital loan falls due for renewal in July 2018. R.E.A. Holdings plc Annual Report and Accounts 2017 31 O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 32 Strategic report Finance continued The PBJ loan is provided by PT Bank UOB Indonesia (“UOB”), is secured on the assets of PBJ and is guaranteed jointly by the company and REA Kaltim. The outstanding balance of the loan at 31 December 2017 was the equivalent of $21.6 million repayable as follows: 2018 $1.1 million, 2019 $3.2 million and thereafter: $17.3 million. Pursuant to the conditional agreement for the sale of PBJ, it is expected that the loan will be discharged upon completion. The KMS loan is provided by PT Bank Mandiri (Persero) Tbk (“Mandiri”), is secured on the assets of KMS and is guaranteed by the company. The outstanding balance of the loan at 31 December 2017 was the equivalent of $18.2 million repayable as follows: 2018: $0.3 million, 2019: $1.5 million and thereafter $16.4 million. At 31 December 2017, unutilised facilities available to the group comprised the equivalent of $7.9 million available to be drawn from UOB as an addition to the existing amortising term loan to PBJ (subject to discharge upon the sale of PBJ). The company has shareholder authority to buy back limited numbers of ordinary shares into treasury with the intention that, once a holding of a reasonable size has been accumulated, the holding be placed with one or more investors. No acquisitions pursuant to this authority were made in 2017 but 132,500 ordinary shares had been previously acquired and remain held in treasury. Group cash ﬂow Group cash inﬂows and outﬂows are analysed in the consolidated cash ﬂow statement. Cash and cash equivalents decreased over 2017 from $24.6 million to $5.5 million. As noted under “Group results” above, operating loss for 2017 amounted to $2.2 million compared to a loss of $5.0 million in the prior year. After adjusting for depreciation, amortisation and other non-cash items ($24.1 million) and a reduction in working capital ($23.9 million) cash generated by operations was $45.8 million (2016: $25.4 million). The decrease in working capital was primarily due to careful management of trade payables and an increase in customer deposits. Taxes paid net of refunds at $1.2 million were similar to 2016 ($2.1 million). Interest paid amounted to $24.9 million (2016: $20.7 million) reﬂecting the fact that less interest payable was accrued at year-end than in the prior year. Investing activities for 2017 involved a net outﬂow of $33.7 million (2016: $31.6 million). This represented new investment of $33.7 million (2016: $33.4 million) offset by a small amount of interest received. The new investment comprised expenditure of $32.0 million (2016: $31.1 million) on further development of the group’s agricultural operations, $0.9 million (2016: $0.4 million) on land rights and titling and $0.7 million (2016: $1.9 million) on the stone and coal operations. The net cash outﬂow from ﬁnancing activities amounted to $4.9 million (2016: inﬂow of $37.8 million) made up as follows: 2016 $’m $’m 2017 Issue of new ordinary shares – 13.1 Issue of new preference shares 10.9 – Issue/sale of new sterling notes – 1.9 Redemption of 2017 dollar notes (20.2) – Redemption of 2017 sterling notes (11.1) – Reorganisation of dollar notes – (0.1) Sale of investments 7.1 – Sale of shareholding in subsidiary – 14.0 Borrowings from non-controlling shareholder and related party 24.0 12.4 Net change in other borrowings (7.8) 3.9 Dividend payments (7.8) (7.4) (4.9) 37.8 Liquidity and ﬁnancing adequacy Whilst the group again reported a loss in 2017, as explained elsewhere in this Strategic report that loss reﬂected an increase in operating costs of which the full beneﬁts did not accrue in 2017, crops that although higher than in 2016 were still below those that the group should be delivering and a level of ﬁnancing charges disproportionate to the proﬁtability of the group. Crops are now recovering further and with much of the remedial work needed on the group’s mature estates completed should, subject to CPO and CPKO prices, deliver increased revenues without a proportionate increase in operating costs. The directors are therefore conﬁdent that the group’s operations will become increasingly cash generative. As noted under “Future direction” above, the group has entered into a conditional agreement for the divestment of PBJ, such agreement being conditional upon shareholder approval, necessary regulatory consents in Indonesia and the consent of REA Kaltim’s lending bank. The proceeds of the sale of the PBJ shares and the repayment of monies owed by PBJ to the group will be applied in reduction of REA group indebtedness. Such agreement will be subject to approval by the company’s shareholders and to the usual regulatory consents in Indonesia. It is expected that completion of the sale will occur in September 2018. In addition to addressing ﬁnance costs by reducing overall levels of indebtedness, the group is also seeking to convert Indonesian rupiah denominated borrowings into dollar denominated borrowings upon which the group would be charged interest at dollar interest rates which are signiﬁcantly 32 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 33 lower than rupiah interest rates. As a ﬁrst step in this direction, the group has recently obtained an offer of a new $35 million dollar denominated bank facility which may be utilised either in its entirety to replace rupiah borrowings or in part for that purpose (to the extent of the equivalent of $12 million) and in part to provide the group with additional undrawn borrowing facilities. As noted under “Capital structure” above, as at 31 December 2017, the group held cash of $5.6 million and had undrawn facilities equivalent to a total of $7.9 million under the UOB amortising term loan facility. This facility will continue to be used partially to fund expenditure on PBJ pending completion of its sale, whereupon it is expected that the loan will be discharged. In addition, the balance of 2022 dollar notes remaining in treasury at end 2017 has now been sold to realise $2.6 million and available liquidity has been further augmented to the extent of the $23 million available as a result of the facility offer above. Sale of PBJ will very substantially further improve the group’s available cash resources. As at 31 December 2017, bank debt due within one year amounted to $28.1 million. Of this, $22.0 million represented drawings under the group’s revolving working capital facilities. The directors have no reason to believe that these facilities will not be rolled over at the end of July 2018 when the facilities fall due for renewal. Since June 2015, the group’s ﬁnancial position has been much improved by the subscription of some $39.5 million for new ordinary and preference shares, the issue of a total of $65 million of 2020 sterling notes and 2022 dollar notes in replacement of previous notes now redeemed and the loan and equity investment totalling $44 million by DSN. The sale of PBJ should complete the ﬁnancial restructuring. The sale of PBJ will serve the important ﬁnancial purpose of reducing debt. It will also permit the group to consolidate its operational activities in a more compact area and to operate for longer without the need for an additional oil mill. This can be expected to result in a capital expenditure programme better aligned to the group’s operational cash ﬂows. The steady progress towards the resumption of mining on the group’s principal coal concession should also lead to progressive recovery of amounts invested in coal. On the reasonable assumption that the divestment of PBJ will be completed as expected, the directors are conﬁdent that the group will have the cash resources that it needs for the foreseeable future. Should the sale of PBJ for any reason not be completed (an eventuality that the directors consider unlikely), then the group would be left with a higher level of indebtedness than the directors believe is desirable. Depending upon the level of CPO prices and operational performance during the remainder of 2018, the group may then need to seek some additional equity funding to address this. The group’s oil palms fruit continuously throughout the year and there is therefore no material seasonality in the funding requirements of the agricultural operations in their ordinary course of business. It is not expected that development of the stone and coal operations will cause any material swings in the group’s utilisation of cash for the funding of its routine activities. Financing policies The directors believe that, in order to maximise returns to holders of the company’s ordinary shares, a proportion of the group’s funding needs should be met with prior ranking capital, namely borrowings and preference share capital. The latter has the particular advantage that it represents relatively low risk permanent capital and, to the extent that such capital is available, the directors believe that it is to be preferred to debt. As respects group borrowings, the directors believe that the group’s interests are best served if borrowings are structured to ﬁt the maturity proﬁle of the assets that the borrowings are ﬁnancing. Since oil palm plantings take nearly four years from nursery planting to maturity and then a further period of three to four years to full yield, the directors would prefer to structure borrowings for the group’s agricultural operations so that shorter term bank debt is used only to ﬁnance working capital requirements, while debt funding for the group’s extension planting programme is sourced from issues of listed debt securities and medium term bank borrowings. Whilst the group’s borrowings were, when put in place, substantially consistent with the above objectives, subsequent events and in particular some delays in the original plans for expansion of the group’s planted hectarage, meant that by the end of 2014, the group had become too dependent on short term debt. To address this and to improve the repayment proﬁle of the group’s debt, the group has taken various steps as noted under “Liquidity and ﬁnancing adequacy”. As a result, the group’s ﬁnancing position is now much improved. The group’s ﬁnancial restructuring would be completed on the closing of the sale of PBJ. Net debt at 31 December 2017 was 76.5 per cent of total shareholder funds against a level of 66.3 per cent at 31 December 2016. The sale of PBJ will reduce net debt, Thereafter the directors expect that with growth in the net assets attributable to ordinary shareholders, the percentage of ordinary shareholder funds represented by prior ranking capital will, over time, to be further reduced. The 2020 sterling notes and the 2022 dollar notes carry interest at ﬁxed rates of, respectively, 8.75 and 7.5 per cent per annum. Interest is payable by REA Kaltim and SYB under O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 33 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 34 Strategic report Finance continued the DBS amortising term loans and working capital lines, and by PBJ under the UOB term loan, at ﬂoating rates equal to Jakarta Inter Bank Offered Rate plus a margin and by KMS under the Mandiri loan at a ﬁxed rate of 11.5 per cent. As a policy, the group does not hedge its exposure to ﬂoating rates but maintains a balance between ﬂoating and ﬁxed rate borrowings. A one per cent increase in the ﬂoating rates of interest payable on the group’s ﬂoating rate borrowings at 31 December 2017 would have resulted in an additional annual cost to the group of approximately $1.3 million (2016: $1.4 million). The group regards the dollar as the functional currency of most of its operations. The directors believe that the group will be best served going forward by simply maintaining a balance between its borrowings in different currencies and avoiding currency hedging transactions. Accordingly, the group regards some exposure to currency risk on its non- dollar borrowing as an inherent and unavoidable risk of its business. The group has never covered, and does not intend in future to cover, the currency exposure in respect of the component of the investment in its operations that is ﬁnanced with sterling denominated shareholder capital. The group’s policy is to maintain a cash balance in sterling sufﬁcient to meet its projected sterling expenditure for a period of between six and twelve months and a limited cash balance in Indonesian rupiah. 34 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 35 O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Sun bear Orangutan Colugo (ﬂying lemur) Sambar Mountain serpent eagle Macaque R.E.A. Holdings plc Annual Report and Accounts 2017 35 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 36 Strategic report Risks and uncertainties The group’s business involves risks and uncertainties. Identiﬁcation, assessment, management and mitigation of the risks associated with environmental, social and governance matters forms part of the group’s system of internal control for which the board of the company has ultimate responsibility. The board discharges that responsibility as described in “Corporate governance” below. Where risks are reasonably capable of mitigation, the group seeks to mitigate them. Beyond that, the directors endeavour to manage the group’s ﬁnances on a basis that leaves the group with some capacity to withstand adverse impacts from identiﬁed areas of risk but such management cannot provide insurance against every possible eventuality. Those risks and uncertainties that the directors currently consider to be material are described below. There are or may be other risks and uncertainties faced by the group that the directors currently deem immaterial, or of which they are unaware, that may have a material adverse impact on the group. Material risks, related policies and the group’s successes and failures with respect to environmental, social and governance matters and the measures taken in response to any failures are described in more detail under “Sustainability” above. Risk Potential impact Risks assessed by the directors as being of particular signiﬁcance are those detailed below under climatic and other operational factors, produce prices and funding. In the case of climatic and other operational factors and produce prices, the directors’ assessment reﬂects the negative impact on revenues that could be caused by adverse climatic conditions or operational circumstances and, in the case of funding, the considerations referred to in the “Viability statement” in the “Directors’ report” below. Mitigating or other relevant considerations A loss of crop or reduction in the quality of harvest resulting in loss of potential revenue Over a long period, crop levels should be reasonably predictable Agricultural operations Climatic factors Material variations from the norm in climatic conditions Unusually low levels of rainfall that lead to a water availability below the minimum required for the normal development of the oil palm Overcast conditions A reduction in subsequent crop levels resulting in loss of potential revenue; the reduction is likely to be broadly proportional to the cumulative size of the water deﬁcit Delayed crop formation resulting in loss of potential revenue Low levels of rainfall disrupting river transport or, in an extreme situation, bringing it to a standstill Inability to obtain delivery of estate supplies or to evacuate CPO and CPKO (possibly leading to suspension of harvesting) Operations are located in an area of high rainfall. Notwithstanding some seasonal variations, annual rainfall is usually adequate for normal development Normal sunshine hours in the location of the operations are well suited to the cultivation of oil palm The group has established a permanent downstream loading facility, where the river is tidal. In addition, road access (currently requiring repair) between the ports of Samarinda and Balikpapan and the estates when available offers a viable alternative route for transport with any associated additional cost more than outweighed by the potential negative impact of disruption to the business cycle by any delay in evacuating CPO Cultivation risks Pest and disease damage to oil palms and growing crops Other operational factors A loss of crop or reduction in the quality of harvest resulting in loss of potential revenue The group adopts best agricultural practice to limit pests and diseases Shortages of necessary inputs to the operations, such as fuel and fertiliser Disruption of operations or increased input costs leading to reduced proﬁt margins The group maintains stocks of necessary inputs to provide resilience and has established biogas plants to improve its self- reliance in relation to fuel 36 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 37 Potential impact Mitigating or other relevant considerations FFB crops becoming rotten or over-ripe leading either to a loss of CPO production (and hence revenue) or to the production of CPO that has an above average free fatty acid content and is saleable only at a discount to normal market prices The group endeavours to maintain resilience in its palm oil mills with each of the mills operating separately and some ability within each mill to switch from steam based to biogas or diesel based electricity generation The requirement for CPO and CPKO storage exceeding available capacity and forcing a temporary cessation in FFB harvesting or processing with a resultant loss of crop resulting in a loss of potential revenue The group’s bulk storage facilities have substantial capacity and further storage facilities are afforded by the ﬂeet of barges. Together, these have hitherto always proved adequate to meet the group’s requirements for CPO and CPKO storage Risk Other operational factors A hiatus in collection or processing of FFB crops Disruptions to river transport between the main area of operations and the Port of Samarinda or delays in collection of CPO and CPKO from the transhipment terminal Occurrence of an uninsured or inadequately insured adverse event; certain risks (such as crop loss through ﬁre or other perils), for which insurance cover is either not available or is considered disproportionately expensive, are not insured Produce prices Volatility of CPO and CPKO prices which as primary commodities may be affected by levels of world economic activity and factors affecting the world economy, including levels of inﬂation and interest rates Restriction on sale of the group’s CPO and CPKO at world market prices including restrictions on Indonesian exports of palm products and imposition of high export duties (as has occurred in the past for short periods) Material loss of potential revenues or claims against the group Reduced revenue from the sale of CPO and CPKO production and a consequent reduction in cash ﬂow and proﬁt Reduced revenue from the sale of CPO and CPKO production and a consequent reduction in cash ﬂow and proﬁt Distortion of world markets for CPO and CPKO by the imposition of import controls or taxes in consuming countries, for example, by imposition of reciprocal trade barriers or tariffs between major economies Depression of selling prices for CPO and CPKO if arbitrage between markets for competing vegetable oils proves insufﬁcient to compensate for the market distortion created Expansion Failure to secure in full, or delays in securing, the land or funding required for the group’s planned extension planting programme Inability to complete, or delays in completing, the planned extension planting programme with a consequential reduction in the group’s prospective growth The group maintains insurance at levels that it considers reasonable against those risks that can be economically insured and mitigates uninsured risks to the extent reasonably feasible by management practices Price swings should be moderated by the fact that the annual oilseed crops account for the major proportion of world vegetable oil production and producers of such crops can reduce or increase their production within a relatively short time frame The Indonesian government allows the free export of CPO and CPKO but applies a sliding scale of duties on exports which allows producers economic margins. The extension of this sliding scale to incorporate a $50 per tonne export levy to fund biodiesel subsidies is designed to support the local price of CPO and CPKO The imposition of controls or taxes on CPO or CPKO in one area can be expected to result in greater consumption of alternative vegetable oils within that area and the substitution outside that area of CPO and CPKO for other vegetable oils The group holds substantial fully titled or allocated land areas suitable for planting. It works continuously to obtain and maintain up to date permits for the planting of these areas and aims to manage its ﬁnances to ensure, in so far as practicable, that it will be able to fund the planned extension planting programme O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 37 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 38 Strategic report Risks and uncertainties continued Risk Expansion Potential impact Mitigating or other relevant considerations A shortfall in achieving the group’s planned extension planting programme impacting negatively the continued growth of the group A possible adverse effect on market perceptions as to the value of the company’s securities The group maintains ﬂexibility in its planting programme to be able to respond to changes in circumstances Environmental, social and governance practices Failure by the agricultural operations to meet the standards expected of them as a large employer of signiﬁcant economic importance to local communities Reputational and ﬁnancial damage Reputational and ﬁnancial damage Criticism of the group’s environmental practices by conservation organisations scrutinising land areas that fall within a region that in places includes substantial areas of unspoilt primary rain forest inhabited by diverse ﬂora and fauna Community relations A material breakdown in relations between the group and the host population in the area of the agricultural operations Disruption of operations, including blockages restricting access to oil palm plantings and mills, resulting in reduced and poorer quality CPO and CPKO production Disputes over compensation payable for land areas allocated to the group that were previously used by local communities for the cultivation of crops or as respects which local communities otherwise have rights Disruption of operations, including blockages restricting access to the area the subject of the disputed compensation Individuals party to a compensation agreement subsequently denying or disputing aspects of the agreement Disruption of operations, including blockages restricting access to the areas the subject of the compensation disputed by the affected individuals The group has established standard practices designed to ensure that it meets its obligations, monitors performance against those practices and investigates thoroughly and takes action to prevent recurrence in respect of any failures identiﬁed The group is committed to sustainable development of oil palm and has obtained RSPO certiﬁcation for most of its current operations. All group oil palm plantings are on land areas that have been previously logged and zoned by the Indonesian authorities as appropriate for agricultural development. The group maintains substantial conservation reserves that safeguard landscape level biodiversity The group seeks to foster mutually beneﬁcial economic and social interaction between the local villages and the agricultural operations. In particular, the group gives priority to applications for employment from members of the local population, encourages local farmers and tradesmen to act as suppliers to the group, its employees and their dependents and promotes smallholder development of oil palm plantings The group has established standard procedures to ensure fair and transparent compensation negotiations and encourages the local authorities, with whom the group has developed good relations and who are therefore generally supportive of the group, to assist in mediating settlements Where claims from individuals in relation to compensation agreements are found to have a valid basis the group seeks to agree a new compensation arrangement; where such claims are found to be falsely based the group encourages appropriate action by the local authorities 38 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 39 Risk Potential impact Mitigating or other relevant considerations Stone and coal operations Operational factors Failure by external contractors to achieve agreed production volumes with optimal stripping values or extraction rates Loss of prospective revenue External factors, in particular weather, delaying or preventing delivery of extracted stone and coal Delays to receipt or loss of revenue Geological assessments, which are extrapolations based on statistical sampling, proving inaccurate Unforeseen extraction complications causing cost overruns and production delays or failure to achieve projected production Prices Local competition reducing stone prices and volatility of international coal prices Reduced revenue and a consequent reduction in cash ﬂow and proﬁt Imposition of additional royalties or duties on the extraction of stone or coal Reduced revenue and a consequent reduction in cash ﬂow and proﬁt Unforeseen variations in quality of deposits Inability to supply product within the speciﬁcations that are, at any particular time, in demand with consequent loss of revenue Environmental, social and governance practices Failure by the stone and coal operations to meet the expected standards Reputational and ﬁnancial damage General Currency Strengthening of sterling or the Indonesian rupiah against the dollar Adverse exchange movements on those components of group costs and funding that arise in Indonesian rupiah or sterling and are not hedged against the dollar The group endeavours to use experienced contractors, to supervise them closely and to take care to ensure that they have equipment of capacity appropriate for the planned production volumes Deliveries are not normally time critical and adverse external factors would not normally have a continuing impact for more than a limited period The group seeks to ensure the accuracy of geological assessments of any extraction programme and takes expert geological advice on the results There are currently no other stone quarries in the vicinity of the group’s deposits and the cost of transporting stone should restrict competition. In relation to coal, the high quality of the coal in the group’s main coal concession may limit volatility The Indonesian government has not to date imposed measures that would seriously affect the viability of Indonesian stone quarrying or coal mining operations Geological assessments ahead of commencement of extraction operations should have identiﬁed any material variations in quality The areas of the stone and coal concessions are relatively small and should not be difﬁcult to supervise. The group is committed to international standards of best environmental and social practice and, in particular, to proper management of waste water and reinstatement of quarried and mined areas on completion of extraction operations As respects costs and sterling denominated shareholder capital, the group considers that this risk is inherent in the group’s business and structure and must simply be accepted. As respects borrowings, where efﬁcient the group seeks to borrow in dollars but, when borrowing in another currency, considers it better to accept the resultant currency risk than to hedge that risk with hedging instruments O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 39 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 40 Strategic report Risks and uncertainties continued Risk Funding Bank debt repayment instalments and other debt maturities coincide with periods of adverse trading and negotiations with bankers and investors are not successful in rescheduling instalments, extending maturities or otherwise concluding satisfactory reﬁnancing arrangements Potential impact Mitigating or other relevant considerations Inability to meet liabilities as they fall due The group maintains good relations with its bankers and other holders of debt who have generally been receptive to reasonable requests to moderate debt proﬁles when circumstances require; moreover, the directors believe that the fundamentals of the group’s business will facilitate divestment of assets or procurement of additional equity capital should this prove necessary The group maintains strict controls over its ﬁnancial exposures which include regular reviews of the creditworthiness of counterparties and limits on exposures to counterparties. Export sales are made either against letters of credit or on the basis of cash against documents The directors are not aware of any speciﬁc planned changes that would adversely affect the group to a material extent; current regulations restricting the size of oil palm growers in Indonesia will not impact the group for the foreseeable future The group endeavours to ensure compliance with the continuing conditions attaching to its land rights and concessions and that activities are conducted within the terms of the licences and permits that are held and that licences and permits are obtained and renewed as necessary The group has traditionally had, and continues to maintain, strong controls in this area because Indonesia, where all of the group’s operations are located, has been classiﬁed as relatively high risk by the International Transparency Corruption Perceptions Index Maintenance of good relations with local partners to ensure that returns appropriately reﬂect agreed arrangements Counterparty risk Default by a supplier, customer or ﬁnancial institution Loss of any prepayment, unpaid sales proceeds or deposit Regulatory exposure New, and changes to, laws and regulations that affect the group (including, in particular, laws and regulations relating to land tenure, work permits for expatriate staff and taxation) Breach of the various continuing conditions attaching to the group’s land rights and the stone quarry concession (including conditions requiring utilisation of the rights and concessions) or failure to maintain all permits and licences required for the group’s operations Failure by the group to meet the standards expected in relation to bribery and corruption Restriction on the group’s ability to retain its current structure or to continue operating as currently Civil sanctions and, in an extreme case, loss of the affected rights or concessions Reputational damage and criminal sanctions Restrictions on foreign investment in Indonesian mining concessions, limiting the effectiveness of co-investment arrangements with local partners Systems access and controls Constraints on the group’s ability to earn an equity return on its investment Weakness in IT controls and ﬁnancial reporting system Likelihood of error or misstatement in ﬁnancial statements The group obtains professional advice to ensure best practice 40 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p01-p41.qxp 27/04/2018 12:56 Page 41 Potential impact Mitigating or other relevant considerations Risk Country exposure Deterioration in the political or economic situation in Indonesia Difﬁculties in maintaining operational standards particularly if there was a consequential deterioration in the security situation In the recent past, Indonesia has been stable and the Indonesian economy has continued to grow but, in the late 1990s, Indonesia experienced severe economic turbulence and there have been subsequent occasional instances of civil unrest, often attributed to ethnic tensions, in certain parts of Indonesia. The group has never, since the inception of its East Kalimantan operations in 1989, been adversely affected by regional security problems The directors are not aware of any circumstances that would lead them to believe that, under current political conditions, any Indonesian government authority would impose exchange controls or otherwise seek to restrict the group’s freedom to manage its operations The group accepts there is a signiﬁcant possibility that foreign owners may be required over time to divest partially ownership of Indonesian oil palm operations but has no reason to believe that such divestment would be at anything other than market value. Moreover, the group has recently increased local participation by a transaction with a local investor The group appreciates its material dependence upon its staff and employees and endeavours to manage this dependence in accordance with international employment standards as detailed under “Employees” in “Sustainability” above The group endeavours to maintain cordial relations with its local investors by seeking their support for decisions affecting their interests and responding constructively to any concerns that they may have O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Introduction of exchange controls or other restrictions on foreign owned operations in Indonesia Restriction on the transfer of proﬁts from Indonesia to the UK with potential consequential negative implications for the servicing of UK obligations and payment of dividends; loss of effective management control Mandatory reduction of foreign ownership of Indonesian plantation operations Forced divestment of interests in Indonesia at below market values with consequential loss of value Miscellaneous relationships Disputes with staff and employees Disruption of operations and consequent loss of revenues Breakdown in relationships with the local shareholders in the company’s Indonesian subsidiaries Reliance on the Indonesian courts for enforcement of the agreements governing its arrangements with local partners with the uncertainties that any juridical process involves and with any failure of enforcement likely to have a material negative impact on the value of the stone and coal operations because the concessions are at the moment legally owned by the group’s local partners The directors have monitored the impact of the decision to terminate membership of the European Union on its operations. So far, the impact has been limited to ﬂuctuations of sterling against the US dollar and the Indonesian rupiah (see “General” “Currency” risk above). The directors do not at present see further signiﬁcant risk to the group’s operations from this decision. Any reduction in UK interest rates may negatively impact the level of the technical provisions of the REA Pension Scheme but, given the Scheme’s estimated funding position, the directors do not expect that the impact will be material in the context of the group. Approved by the board on 26 April 2018 and signed on behalf of the board by DAVID J BLACKETT Chairman R.E.A. Holdings plc Annual Report and Accounts 2017 41 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 42 Governance Board of directors David Blackett Chairman (independent) (67) Committees: audit, nomination (chairman), remuneration David Blackett was appointed a non-executive director in July 2008. After qualifying as a chartered accountant in Scotland, he worked for over 25 years in South East Asia, where he concluded his career as chairman of AT&T Capital Inc’s Asia Paciﬁc operations. Previously, he was a director of an international investment bank with responsibility for the bank’s South East Asian operations and until October 2014 served as an independent non-executive director of South China Holdings Limited (now Orient Victory China Holdings Limited), a company listed on the Hong Kong Stock Exchange. He was appointed chairman on 1 January 2016 following the retirement of Richard Robinow from that position. Irene Chia Independent non-executive director (77) Irene Chia was appointed a non-executive director in January 2013. She has extensive corporate, investment and entrepreneurial experience in Asia, the USA and the UK. A graduate in economics and formerly a director of one of the Jardine Matheson Group companies, she now lives in Singapore and is currently self-employed with Far Eastern interests in consulting, property and ﬁnancial investment as well as in the charitable sector. Carol Gysin Executive director (60) Carol Gysin was appointed to the board as managing director on 21 February 2017. Based in London, she had previously worked for the group for over eight years as group company secretary, with increasing involvement in the operational areas of the business, including making regular visits to the group’s ofﬁces and plantation estates in Indonesia. Prior to joining the group, Carol worked as company secretary to a telecommunications company, Micadant plc (formerly, Ionica Group plc, listed on NASDAQ and in London), to a medical devices company, Weston Medical plc, as well as to a number of early-stage technology companies, following an initial career in investment banking. John Oakley Non-executive director (69) After early experience in investment banking and general management, John Oakley joined the group in 1983 as divisional managing director of the group’s then horticultural operations. He was appointed to the main board in 1985 and in the early 1990s he took charge of the day to day management of the group’s then embryonic East Kalimantan agricultural operations. He was appointed managing director in January 2002 and, until the appointment of a regional executive director in 2013, was the sole executive director of the group. He retired as managing director on 1 January 2016 but remains on the board as a non-executive director and for a transitional period undertaking some additional responsibilities, in particular overseeing completion of the group’s new information systems as well as making twice yearly visits to the group’s estate operations to advise on operational matters. Richard Robinow Non-executive director (72) Richard Robinow was appointed a director in 1978 and became chairman in 1984. Following his seventieth birthday, he retired from the chairmanship on 1 January 2016. He remains on the board as a non-executive director and, for a transitional period, is undertaking some additional responsibilities particularly as respects the ﬁnancing of the group. After early investment banking experience, he has been involved for over 40 years in the plantation industry. He is a non-executive director of M. P. Evans Group plc, a UK plantation company of which the shares are admitted to trading on the Alternative Investment Market of the London Stock Exchange, and of a Kenyan plantation company, REA Vipingo Plantations Limited (substantially all of the shares in which are indirectly owned by his family). Michael St. Clair-George Senior independent non-executive director (75) Committees: audit (chairman), nomination, remuneration (chairman) Michael St. Clair-George was appointed to the board on 24 October 2016. He is a fellow of the Institute of Chartered Accountants in England & Wales. He has over 40 years' experience in the plantation and agribusiness industries in Malaysia and Indonesia, having worked for some 25 years with Harrisons & Crosﬁeld and Harrisons Malaysian Plantations Berhad, as ﬁnance director, and then as president director of Sipef NV's Indonesian operations. He then spent 10 years as managing director of Sipef NV, based in Belgium. Retiring from this position in 2007 and returning to London, he served until 2013 as senior non-executive director and chairman of the audit committee of New Britain Palm Oil Limited, a company then listed in London. Former directors Mark Parry (resigned 20 February 2017) Executive director (56) Mark Parry joined the group in 2011 as the group’s regional director based in Singapore and Indonesia. He was appointed as an executive director in January 2012, as president director of PT REA Kaltim Plantations in July 2012, and as group managing director in January 2016. 42 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 43 Governance Directors’ report The directors present their annual report on the affairs of the group, together with the ﬁnancial statements and auditor’s report, for the year ended 31 December 2017. The “Corporate governance report” below forms part of this report. As set out in note 40 to the consolidated ﬁnancial statements, on 25 April 2018 the company announced that its subsidiary, PT REA Kaltim Plantations (“REA Kaltim”), has entered into a conditional agreement for the sale of REA Kaltim’s 95 per cent interest in PT Putra Bongan Jaya (“PBJ”) to Kuala Lumpur Kepong Berhad (“KLK”). The sale is conditional, inter alia, upon the approval by the company’s shareholders and the consents of Indonesian regulatory authorities. Completion is not expected to occur before 31 August 2018 and the sale agreement will lapse if the conditions have not been satisﬁed by 31 January 2019. Save as regards the conditional sale agreement in respect of PBJ, there are no signiﬁcant events since 31 December 2017 to be disclosed. An indication of likely future developments in the business of the company and details of research and development activities are included in the “Strategic report” above. Information about the use of ﬁnancial instruments by the company and its subsidiaries is given in note 23 to the consolidated ﬁnancial statements. Results and dividends The results are presented in the consolidated income statement and notes thereto. The ﬁxed semi-annual dividends on the 9 per cent cumulative preference shares that fell due on 30 June and 31 December 2017 were duly paid. In line with previous indications and in view of the ﬁnancial performance during 2017, the directors have concluded that, as previously announced, they should not declare or recommend the payment of any dividend on the ordinary shares in respect of 2017. As previously indicated, if crops continue to recover as expected, prices for the group’s palm products are maintained at around current levels, the sale of PBJ is successfully completed and the coal operations start to generate suitable returns, the directors intend to resume the payment of ordinary dividends. However, the programme of development of the group’s land bank remains ongoing and will require further signiﬁcant capital expenditure. The need to fund such expenditure will necessarily inﬂuence the rates at which the directors feel that they can prudently declare, or recommend the payment of, ordinary dividends over the next few years. Viability statement The group’s business activities, together with the factors likely to affect its future development, performance and position are described in the “Strategic report” above which also provides (under the heading “Finance”) a description of the group’s cash ﬂow, liquidity and ﬁnancing adequacy and treasury policies. In addition, note 23 to the consolidated ﬁnancial statements includes information as to the group’s policy, objectives and processes for managing capital, its ﬁnancial risk management objectives, details of ﬁnancial instruments and hedging policies and exposures to credit and liquidity risks. The “Risks and uncertainties” section of the Strategic report describes the material risks faced by the group and actions taken to mitigate those risks. In particular, there are risks associated with the group’s local operating environment and the group is materially dependent upon selling prices for crude palm oil (“CPO”) and crude palm kernel oil over which it has no control. As respects funding risk, the group has material indebtedness, in the form of bank loans and listed notes. Some $5.1 million (excluding $1.1 million of bank loans to PBJ that will be discharged upon completion of the sale of PBJ as referred to below) of bank term indebtedness falls due for repayment during 2018. A further $22.0 million of revolving working capital lines fall due for renewal during the same period. A further £31.9 million ($42.8 million) sterling notes will become repayable in August 2020. In view of the material proportion of the group’s indebtedness falling due in the period to 31 December 2020, as described above, the directors have chosen this period for their assessment of the long-term viability of the group. As announced on 25 April 2018, the group has entered into a conditional agreement for the sale of PBJ. The sale is expected to realise gross proceeds of approximately $85 million and net proceeds of approximately $57 million after repayment of external borrowings and net of selling expenses. The proceeds of the sale of the PBJ shares and the repayment of monies owed by PBJ to other group companies will be applied in reduction of group indebtedness. Completion is not expected to occur before 31 August 2018 and the sale agreement will lapse if the conditions have not been satisﬁed by 31 January 2019. The purchaser has deposited with the group the sum of $8 million by way of a pre-completion advance; should completion not occur then such sum will be repayable. PBJ is a recently planted property but is not currently proﬁtable. Accordingly, its sale will not have a material negative impact on the immediate proﬁt outlook for the group. In the meanwhile, the group is continuing discussions to reﬁnance with longer term debt indebtedness falling due in 2018 and 2019, although the directors have no reason to believe that the revolving working capital facilities falling due in 2018 and 2019 will not be rolled over when they fall due for renewal (all revolving working capital facilities having previously been substantially rolled over on past renewals). In 2020 consideration will be given to the submission of proposals to the holders of the sterling notes to reﬁnance these with securities of longer tenor. R.E.A. Holdings plc Annual Report and Accounts 2017 43 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 44 Governance Directors’ report continued With the improvement in crops now being seen and CPO prices projected to remain at remunerative levels, the group’s plantation operations can be expected to generate increasing cash ﬂows going forward. In addition, the group is currently ﬁnalising arrangements to recommence operations at the group’s principal coal concession and this can be expected to result in increasing cash ﬂow. The group’s ongoing extension planting programme will continue to require material capital expenditure but the group has ﬂexibility as to the rate of development. Moreover, successful completion of the divestment of PBJ referred to above will defer for some years the group’s requirement for a fourth palm oil mill. The directors fully expect that the divestment and ﬁnancing initiatives currently being pursued, coupled with the improving outlook for the group’s internally generated cash ﬂows, will reﬁnance, or permit the group to repay, the group indebtedness falling due for repayment during the period of assessment. However, should funding be required pending completion of these initiatives, the group will seek to issue for cash a limited number of new shares, authority for which will be sought as and when appropriate. Based on the foregoing and after making enquiries, the directors therefore have a reasonable expectation that the company and the group have adequate resources to continue in operational existence for the period to 31 December 2020 and to remain viable during that period. Going concern Material risks faced by the group are set out in the “Risks and uncertainties” section of the “Strategic report” with an indication of those risks regarded by the directors as potentially signiﬁcant together with mitigating and other relevant considerations for the management of risks. Financing policies are described on pages 33 and 34 of the Strategic report and 2017 developments relating to capital structure are detailed in the “Finance” section of the Strategic report under “Capital structure”. The directors have set out their assessment of liquidity and ﬁnancing adequacy on pages 32 and 33 of the Strategic report including the actions either in progress or contemplated in order to ensure adequate liquidity for the next twelve months. Based on the foregoing, having made due enquiries, the directors reasonably expect that the company and the group have adequate resources to continue in operational existence for at least twelve months from the date of approval of the ﬁnancial statements, and therefore they continue to adopt the going concern basis of accounting in preparing the ﬁnancial statements. Greenhouse gas emissions (“GHG”) GHG emissions data for the period 1 January 2016 to 31 December 2017 is as shown below: Tonnes of CO2e 2017 2016 Gross emissions associated with oil palm operations in Indonesia1 663,675 1,033,340 Net emissions associated with oil palm operations in Indonesia 287,679 466,939 Net emissions per tonne of CPO produced 5.38 3.66 Net emissions per planted hectare 4.95 10.81 Electricity, heat, steam and cooling purchased for own use2 57.0 57.3 1 In addition to all material Scope 1 emissions, some Scope 3 emissions have also been included in this category. Examples include GHG emissions associated with the manufacture and transport of the inorganic fertilisers used by, and an estimate of the GHG emissions associated with, the cultivation of fresh fruit bunches purchased by the group’s mills from third parties. 2 The Greenhouse Gas Protocol deﬁnes direct GHG emissions as emissions from sources that are owned or controlled by the reporting entity. These are categorised as Scope 1 emissions. The Protocol deﬁnes indirect GHG emissions as emissions that are a consequence of the activities of the reporting entity, but occur at sources owned or controlled by another entity. Indirect GHG emissions are further categorised into Scope 2 (indirect GHG emissions from the consumption of purchased electricity, heat and steam) and Scope 3 emissions (all other indirect GHG emissions, such as the extraction and production of purchased materials and fuel and transport in vehicles not owned or controlled by the reporting entity). PalmGHG takes into account all Scope 1 emissions and some Scope 2 and Scope 3 GHG emissions. This is the second year that the group has used the PalmGHG tool (v. 3.0.1), developed by the Roundtable on Sustainable Palm Oil (“RSPO”), to calculate the carbon footprint of its oil palm operations in Indonesia in 2017. The PalmGHG tool was developed by a multi-stakeholder group which included leading scientists in the ﬁeld of GHG accounting for oil palm. As of 31 December 2016, all RSPO member palm oil producers have been required to report publicly their GHG emissions using the PalmGHG tool, so it is expected that this methodology will become industry best practice. Following changes to the PalmGHG methodology, the data presented above is not directly comparable with that for the years 2012 to 2016 presented in previous Directors’ reports. The PalmGHG tool uses a lifecycle assessment approach, whereby all of the major sources of GHG emissions (carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O)) linked to the cultivation, processing and transport of oil palm products are quantiﬁed and balanced against the carbon sequestration and GHG emissions’ avoidance as a result of those processes. All direct and the majority of the indirect emissions associated with the group’s oil palm operations in Indonesia are reﬂected. 44 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 45 The boundary of calculation includes all three of the group’s palm oil mills and their supply bases, which is the unit of calculation for the PalmGHG tool. The boundary for the GHG emissions’ reporting thus differs from that used for ﬁnancial reporting, as the emissions linked to oil palm estates which do not yet supply fresh fruit bunches to one of the group’s mills are not directly included. Instead, emissions associated with the land use change component of new oil palm developments (which represent the majority of emissions from new developments) are accumulated over the immaturity period of each development and then amortised over the 25 year oil palm lifecycle. The group has reported both the gross and net GHG emissions associated with its oil palm operations in Indonesia. The net GHG emissions were calculated by deducting from the gross GHG emissions the CO2 that is estimated to have been ﬁxed (sequestered) by the oil palms and conserved set- aside forest through the process of photosynthesis. A further deduction was made to account for the GHG emissions that have been avoided as a result of the export of renewable electricity from the group’s methane capture facilities to domestic buildings and local communities that were previously supplied with electricity by diesel powered generators. The group’s net GHG emissions have been expressed per tonne of CPO produced and per planted hectare (immature and mature). It is deemed necessary to consider both measures because the trend in GHG emissions per planted hectare is not inﬂuenced by the maturity of the oil palm within the supply base, whereas this does impact the GHG emissions per tonne of CPO. The group’s Scope 2 emissions are limited to the electricity purchased by the group’s ofﬁces in London, Jakarta and Samarinda. These GHG emissions are not accounted for in the PalmGHG methodology. These emissions were therefore estimated separately by multiplying the amount of electricity consumed in kilowatt hours by the electricity emission coefﬁcients for the UK and Indonesia respectively. Since these emissions are immaterial by comparison with the GHG emissions associated with the group’s oil palm operations they have not been included in the net GHG emissions to ensure that the methodology used to calculate the intensity of the group’s GHG emissions is consistent with what is likely to become the standard oil palm industry methodology for reporting GHG emission intensity. Control and structure of capital Details of the company’s share capital and changes in share capital during 2017 are set out in note (xi) to the company’s ﬁnancial statements. At 31 December 2017, the issued preference share capital and the issued ordinary share capital represented, respectively, 87.7 and 12.3 per cent of the nominal value of the total issued share capital. The rights and obligations attaching to the ordinary and preference shares are governed by the company’s articles of association and prevailing legislation. A copy of the articles of association is available on the company’s website at www.rea.co.uk. Rights to income and capital are summarised in note 30 to the company’s ﬁnancial statements. On a show of hands at a general meeting of the company, every holder of shares and every duly appointed proxy of a holder of shares, in each case being entitled to vote on the resolution before the meeting, shall have one vote. On a poll, every holder of shares present in person or by proxy and entitled to vote on the resolution the subject of the poll shall have one vote for each share held. Holders of preference shares are not entitled to vote on a resolution proposed at a general meeting unless, at the date of notice of the meeting, the dividend on the preference shares is more than six months in arrears or the resolution is for the winding up of the company or is a resolution directly and adversely affecting any of the rights and privileges attaching to the preference shares. Deadlines for the exercise of voting rights and for the appointment of a proxy or proxies to vote in relation to any resolution to be proposed at a general meeting are governed by the company’s articles of association and prevailing legislation and will normally be as detailed in the notes accompanying the notice of the meeting at which the resolution is to be proposed. There are no restrictions on the size of any holding of shares in the company. Shares may be transferred either through the CREST system (being the relevant system as deﬁned in the Uncertiﬁcated Securities Regulations 2001 of which Euroclear UK & Ireland Limited is the operator) where held in uncertiﬁcated form or by instrument of transfer in any usual or common form duly executed and stamped, subject to provisions of the company’s articles of association empowering the directors to refuse to register any transfer of shares where the shares are not fully paid, the shares are to be transferred into a joint holding of more than four persons, the transfer is not appropriately supported by evidence of the right of the transferor to make the transfer or the transferor is in default in compliance with a notice served pursuant to section 793 of the Companies Act 2006. The directors are not aware of any agreements between shareholders that may result in restrictions on the transfer of securities or on voting rights. No person holds securities carrying special rights with regard to control of the company and there are no arrangements in which the company co-operates by which ﬁnancial rights carried by shares are held by a person other than the holder of the shares. The articles of association provide that the business of the company is to be managed by the directors and empower the directors to exercise all powers of the company, subject to the provisions of such articles (which include a provision O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 45 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 46 Governance Directors’ report continued speciﬁcally limiting the borrowing powers of the group) and prevailing legislation and subject to such directions as may be given by the company in general meeting by special resolution. The articles of association may be amended only by a special resolution of the company in general meeting and, where such amendment would modify, abrogate or vary the class rights of any class of shares, with the consent of that class given in accordance with the company’s articles of association and prevailing legislation. The 7.5 per cent dollar notes 2022 (the “dollar notes”) of the company and the 8.75 per cent guaranteed sterling notes 2020 (the “sterling notes”) that have been issued by REA Finance B.V. and guaranteed by the company are transferable either through the CREST system where held in uncertiﬁcated form or by instrument of transfer. Transfers may be in any usual or common form duly executed in amounts and multiples: in the case of the dollar notes of $120,000 and integral multiples of $1 in excess thereof; and, in the case of the sterling notes, of £100,000 and integral multiples of £1,000 in excess thereof. There is no maximum limit on the size of any holding in each case. Signiﬁcant holdings of preference shares, dollar notes and sterling notes shown by the respective registers of members and noteholders at 31 December 2017 are set out below. Preference Dollar Sterling notes shares notes 2020 2022 Substantial holders of securities £’000 £’000 £’000 HSBC Global Custody Nominee (UK) 6,867 Limited 641898 acct – – – KBC Securities NV Client acct – 5,512 R.E.A. Services Limited* – 2,730 – State Street Nominees Limited OU61 acct 9,339 7,300 11,051 The Bank of New York (Nominees) Limited AHIF account – – Vidaco Nominees Limited CLRLUX acct – 4,039 4,875 – * The 7.5 per cent dollar notes 2022 held in treasury by the company’s subsidiary R.E.A. Services Limited have been sold subsequent to the year end as detailed in note 20. A change of control of the company would entitle holders of the sterling notes to require repayment of the notes held by them as detailed in note 25 to the consolidated ﬁnancial statements. Substantial holders On 31 December 2017, the company had received notiﬁcations in accordance with chapter 5 of the Disclosure Rules and Transparency Rules of the Financial Conduct Authority of the following voting rights held by them as holders of ordinary shares of the company: Number Percentage of of ordinary voting Substantial holders of ordinary shares shares rights Emba Holdings Limited 11,082,420 27.4 Prudential plc and certain subsidiaries* 6,043,129 15.0 Alcatel Bell Pensioenfonds VZW 4,167,049 10.3 Artemis UK Smaller Companies 3,563,620 8.8 Aberforth LLP 2,946,902 7.3 The Capital Group Companies, Inc 2,162,000 5.4 * The company has been notiﬁed that the interest of Prudential plc group of companies includes 6,021,116 ordinary shares (14.9 per cent) in which M&G Investment Funds 3 is also interested. The shares held by Emba Holdings Limited (“Emba”) are included as part of the interest of Richard Robinow shown under “Statement of directors’ shareholdings” in the Directors’ remuneration report. During the period from 31 December 2017 to the date of this report, the company did not receive any further notiﬁcations in accordance with chapter 5 of the Disclosure Rules and Transparency rules. The directors are not aware of any agreements between the company and its directors or between any member of the group and a group employee that provides for compensation for loss of ofﬁce or employment that occurs because of a takeover bid. Directors The directors who served during 2017 (who include all of the directors proposed for election or re-election) are listed under “Board of directors” above, which is incorporated by reference in this “Directors’ report”. Mark Parry resigned as managing director on 20 February 2017. David Blackett, John Oakley and Richard Robinow retire at the forthcoming annual general meeting and, being eligible, offer themselves for re-election, such retirement being in compliance with the provisions of the UK Corporate Governance Code requiring the annual re-election of non- executive directors who have served for more than nine years. Resolutions 4, 5 and 6, which are set out in the accompanying notice of the forthcoming annual general meeting (“the 2018 Notice”) and will be proposed as ordinary resolutions, deal with the re-election of David Blackett, John Oakley and Richard Robinow. Michael St. Clair George, as senior independent non-executive director, conﬁrms that, following a formal performance evaluation of the chairman, Mr Blackett’s performance continues to be effective and to demonstrate his commitment to the role. Accordingly, Mr St. Clair George together with fellow non-executive directors recommend the re-election of Mr Blackett as a non-executive director. John Oakley and Richard Robinow relinquished their positions as, respectively, managing director and chairman of the 46 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 47 company at the end of 2015. However they remain on the board as non-executive directors and continue to oversee certain executive matters to the extent necessary to ensure a smooth transfer of their responsibilities. The group continues to beneﬁt from John Oakley’s knowledge of agronomical practices as well as his essential oversight of the development and implementation of the group’s new information technology systems. As respects Richard Robinow, his signiﬁcant family shareholding in the company supports the development of the group, particularly with regard to current strategic initiatives. The chairman conﬁrms that, following a formal evaluation, the performance of each of the non-executive directors continues to be effective and recommends each of John Oakley and Richard Robinow for re-election a non-executive director. The chairman particularly welcomes the valuable commitment and extensive experience of all of the directors. Mark Parry's directorships with the company and all subsidiaries of the group ceased with effect from 20 February 2017. His employment with the company's Singapore subsidiary ended on 20 May 2017. Directors’ indemnities Qualifying third party indemnity provisions (as deﬁned in section 234 of the Companies Act 2006) were in force for the beneﬁt of directors of the company and of other members of the group throughout 2017 and remain in force at the date of this report. Political donations No political donations were made during the year. Acquisition of the company’s own shares The company’s articles of association permit the purchase by the company of its own shares subject to prevailing legislation which requires that any such purchase (commonly known as a “buy-back”), if a market purchase, has been previously authorised by the company in general meeting and, if not, is made pursuant to a contract of which the terms have been authorised by a special resolution of the company in general meeting. The company currently holds 132,500 of its ordinary shares of 25p each, representing 0.33 per cent of the called up ordinary share capital, as treasury shares with the intention that, once a holding of reasonable size has been accumulated, such holding be placed with one or more substantial investors on a basis that, to the extent reasonably possible, broadens the spread of substantial shareholders in the company. Save to the extent of this intention, no agreement, arrangement or understanding exists whereby any ordinary shares acquired pursuant to the share buy-back authority referred to below will be transferred to any person. The directors are seeking renewal at the forthcoming annual general meeting (resolution 9 set out in the 2018 Notice) of the buy-back authority granted in 2017 to purchase up to 5,000,000 ordinary shares, on terms that the maximum number of ordinary shares that may be bought back and held in treasury at any one time is limited to 400,000 ordinary shares. The directors may, if it remains appropriate, seek further annual renewals of this authority at subsequent annual general meetings. The authorisation being sought will continue to be utilised only for the limited purpose of buying back ordinary shares into treasury with the expectation that the shares bought back will be re-sold when circumstances permit. The new authority, if provided, will expire on the date of the annual general meeting to be held in 2019 or on 30 June 2019 (whichever is the earlier). The renewed buy-back authority is sought on the basis that the price (exclusive of expenses, if any) that may be paid by the company for each ordinary share purchased by it will be not less than £1.00 and not greater than an amount equal to the higher of: (i) 105 per cent of the average of the middle market quotations for the ordinary shares in the capital of the company as derived from the Daily Ofﬁcial List of the London Stock Exchange for the ﬁve business days immediately preceding the day on which such share is contracted to be purchased; and (ii) the higher of the last independent trade and the current highest independent bid on the London Stock Exchange. Any ordinary shares held in treasury by the company will remain listed and form part of the company’s issued ordinary share capital. However, the company will not be entitled to attend meetings of the members of the company, exercise any voting rights attached to such ordinary shares or receive any dividend or other distribution (save for any issue of bonus shares). Sales of shares held in treasury will be made from time to time as investors are found, following which the new legal owners of the ordinary shares will be entitled to exercise the usual rights from time to time attaching to such shares and to receive dividends and other distributions in respect of the ordinary shares. The consideration payable by the company for any ordinary shares purchased by it will come from the distributable reserves of the company. The proceeds of sale of any ordinary shares purchased by the company would be credited to distributable reserves up to the amount of the purchase price paid by the company for the shares, with any excess over such price being credited to the share premium account of the company. Thus, as regards its impact on both cash resources and distributable reserves, it is intended that exercise of the share buy-back authority will be broadly neutral. The company will continue to comply with its obligations under the Listing Rules of the Financial Conduct Authority (“the Listing Rules”) in relation to the timing of any share buy-backs and re-sales of ordinary shares from treasury. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 47 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 48 Governance Directors’ report continued Authorities to allot share capital At the annual general meeting held on 13 June 2017, shareholders authorised the directors under the provisions of section 551 of the Companies Act 2006 to allot ordinary shares or 9 per cent cumulative preference shares within speciﬁed limits. Replacement authorities are being sought at the 2018 annual general meeting (resolutions 10 and 11 set out in the 2018 Notice) to authorise the directors (a) to allot and to grant rights to subscribe for, or to convert any security into, ordinary shares in the capital of the company (other than 9 per cent cumulative preference shares) up to an aggregate nominal amount of £2,372,617 representing 23.5 per cent of the issued ordinary share capital (excluding treasury shares) at the date of this report, and (b) to allot and to grant rights to subscribe for, or to convert any security into, 9 per cent cumulative preference shares in the capital of the company up to an aggregate nominal amount of £13,000,000 representing 18.1 per cent of the issued preference share capital of the company at the date of this report. The new authorities, if provided, will expire on the date of the annual general meeting to be held in 2019 or on 30 June 2019 (whichever is the earlier). The directors have no present intention of exercising these authorities. Authority to disapply pre-emption rights Fresh powers are also being sought at the forthcoming annual general meeting under the provisions of sections 571 and 573 of the Companies Act 2006 to enable the board to make a rights issue or open offer of ordinary shares to existing ordinary shareholders without being obliged to comply with certain technical requirements of the Companies Act 2006 which can create problems with regard to fractions and overseas shareholders. In addition, the resolution to provide these powers (resolution 12 set out in the 2018 Notice) will, if passed, empower the directors to make issues of ordinary shares for cash other than by way of a rights issue or open offer up to a maximum nominal amount of £1,009,425 (representing 10 per cent of the issued ordinary share capital of the company (excluding treasury shares) at the date of this report). The foregoing powers (if granted) will expire on the date of the annual general meeting to be held in 2019 or on 30 June 2019 (whichever is the earlier). General meeting notice period At the 2018 annual general meeting a resolution (resolution 13 set out in the 2018 Notice) will be proposed to authorise the directors to convene a general meeting (other than an AGM) on 14 clear days’ notice (subject to due compliance with requirements for electronic voting). The authority will be effective until the date of the annual general meeting to be held in 2019 or on 30 June 2019 (whichever is the earlier). This resolution is proposed following legislation which, notwithstanding the provisions of the company’s articles of association and in the absence of speciﬁc shareholder approval of shorter notice, has increased the required notice period for general meetings of the company to 21 clear days. While the directors believe that it is sensible to have the ﬂexibility that the proposed resolution will offer to convene general meetings on shorter notice than 21 days, this ﬂexibility will not be used as a matter of routine for such meetings, but only where use of the ﬂexibility is merited by the business of the meeting and is thought to be to the advantage of shareholders as a whole. Recommendation The board considers that the proposals to grant the directors the authorities and powers as detailed under “Acquisition of the company’s own shares”, “Authorities to allot share capital” and “Authority to disapply pre-emption rights” above and the proposal to permit general meetings (other than annual general meetings) to be held on just 14 clear days’ notice as detailed under “General meeting notice period” above are all in the best interests of the company and shareholders as a whole and accordingly the board recommends that shareholders vote in favour of resolutions 9 to 13 as set out in the 2018 Notice. Directors’ remuneration report Resolution 2 as set out in the 2018 Notice provides for approval of the company’s remuneration report regarding the remuneration of directors as detailed in the “Directors’ remuneration report” below. Resolution 3 as set out in the 2018 Notice provides for approval of the company’s remuneration policy as set out in the ‘Policy Report’ below and which is unchanged from the policy approved by shareholders at the company’s 2015 annual general meeting. Auditor Each director of the company at the date of approval of this report has conﬁrmed that, so far as such director is aware, there is no relevant audit information of which the company’s auditor is unaware; and that such director has taken all the steps that ought to be taken as a director in order to make himself or herself aware of any relevant audit information and to establish that the company’s auditor is aware of that information. This conﬁrmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. Deloitte LLP have expressed their willingness to continue in ofﬁce as auditor and Resolution 7 set out in the 2018 Notice proposes their re-appointment. 48 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 49 Disclosure requirements of Listing Rule 9.8.4R The following table references the location of information required to be disclosed in accordance with Rule 9.8.4R of the Listing Rules published by the Financial Conduct Authority. Listing Rule 9.8.4(1) 9.8.4(2) 9.8.4(4) 9.8.4(5) 9.8.4(6) 9.8.4(7) Disclosure requirement Disclosure in annual report Listing Rule Disclosure requirement The amount of interest capitalised dur- ing the year with an indication of the amount and treatment of any related tax relief Note 8 to the consolidated ﬁnancial statements 9.8.4(11) Contracts for the provision of services to the company or any of its subsidiary undertakings by a controlling shareholder Disclosure in annual report Not applicable Not applicable 9.8.4(12) Arrangements under which a Not applicable shareholder has waived or agreed to waive any dividends Not applicable 9.8.4(13) Where a shareholder has agreed to waive future dividends Not applicable 9.8.4(14) Board statement in respect of Not applicable relationship agreement with the controlling shareholder Not applicable Not applicable Not applicable By order of the board R.E.A. SERVICES LIMITED Secretary 26 April 2018 Any information required by Listing Rules 9.2.18 R (publication of unaudited ﬁnancial information) Details of long-term incentive scheme as required under LR 9.4.3R (2) (for a sole director to facilitate recruitment or retention) Any arrangements under which a director has waived or agreed to waive any emoluments from the company or any subsidiary undertaking Any arrangement under which a director has agreed to waive future emoluments Allotments for cash of equity securities made during the period under review otherwise than to the holders of the company’s equity shares in proportion to their holdings of such equity shares and which has not been speciﬁcally authorised by the company’s shareholders 9.8.4(8) 9.8.4(9) Allotments of shares for cash by a major subsidiary of the company Not applicable Participation by a parent company in any placing made by the company Not applicable 9.8.4(10) Any contract of signiﬁcance: (i) to which the listed company, or one of its subsidiary undertakings, is a party and in which a director of the listed company is or was materially interested; and (ii) between the listed company, or one of its subsidiary undertakings, and a controlling shareholder Note 38 to the consolidated ﬁnancial statements O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 49 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 50 Governance Corporate governance report Throughout the year ended 31 December 2017, the company was in compliance with the provisions set out in the 2016 UK Corporate Governance Code issued by the Financial Reporting Council (the “Code”), save as respects Code provision C.3.3.1 regarding audit committees, as respects Code provision B.2.1 regarding nomination committees and as respects Code provision D.2.1 regarding remuneration committees for the reasons explained under “Board committees” below. The Code is available from the Financial Reporting Council’s website at “www.frc.org.uk”. Chairman’s statement on corporate governance The directors appreciate the importance of ensuring that the group’s affairs are managed effectively and with integrity and acknowledge that the principles laid down in the Code provide a widely endorsed model for achieving this. The directors seek to apply the Code principles in a manner proportionate to the group’s size but, as the Code permits, reserving the right, when it is appropriate to the individual circumstances of the company, not to comply with certain Code principles and to explain why. The directors are mindful of proposed revisions to the Code which are expected to take effect for accounting periods beginning on or after 1 January 2019 and will pay due regard to such revisions when published. At the performance evaluation conducted in 2017, the board concluded that the board is performing effectively as constituted and that the complementary skills of individual board members are appropriate for the size and strategic direction of the group and for the challenges that it faces. It was considered that each director brings separate valuable insights into, variously, the plantation industry, business in Indonesia and the group’s affairs. The directors are conscious that the group relies not only on its shareholders but also on the holders of its debt securities for the provision of the capital that the group utilises. The comments below regarding liaison with shareholders apply equally to liaison with holders of debt securities. for leadership and management of the board in the discharge of its duties; the managing director has responsibility for the executive management of the group overall. Neither has unfettered powers of decision. Irene Chia and Michael St. Clair-George are considered by the board to be independent directors. Further, the Chairman on appointment was considered to meet the board of directors’ criteria for independence. There is a regular and robust dialogue, both formal and informal, between all directors and senior management and communication is open and constructive and non-executive directors are able to express their views, speak frankly and raise issues or concerns. Executive management is responsive to feedback from non- executive directors and to requests for clariﬁcation and ampliﬁcation. The company carries appropriate insurance against legal action against its directors. The current policy was in place throughout 2017 in compliance with the Code requirement to carry such insurance. Composition of the board The board currently comprises one executive director and ﬁve non-executive directors (including the chairman). Carol Gysin, who is based in London, was appointed managing director on 21 February 2017, following the resignation of Mark Parry on 20 February 2017. Biographical information concerning each of the directors of the company is set out under “Board of directors” above. The variety of backgrounds brought to the board by its members provides perspective and facilitates balanced and effective strategic planning and decision making for the long-term success of the company in the context of the company’s obligations and responsibilities both as the owner of a business in Indonesia and as a UK listed entity. In particular, the board believes that the respective skills and experience of its members complement each other and that their knowledge and commitment is of speciﬁc relevance to the nature and geographical location of the group’s operations. Role and responsibilities of the board The board is responsible for the proper management of the company. The board has a schedule of matters reserved for its decision which is kept under review. Such matters include strategy, material investments and ﬁnancing decisions and the appointment or removal of executive directors and the company secretary. In addition, the board is responsible for ensuring that resources are adequate to meet the group’s objectives and for reviewing performance, ﬁnancial and operational controls, risk and compliance with the group’s policies and procedures with respect to business ethics, human rights, diversity and sustainability. The chairman and managing director (being the chief executive) have deﬁned separate responsibilities under the overall direction of the board. The chairman has responsibility The group has previously indicated its intention that, over time, overall executive responsibility for the management of the group will progressively be transferred from the UK to Indonesia and Singapore and that, as a consequence, the group’s London ofﬁce will be reduced to a secretariat managing the company’s London listing and liaising with its European shareholders. In line with this intention, a number of executive functions have, over the past few years, been successfully transferred from the UK to Singapore and Indonesia. However, the group has concluded that it is important to maintain separation between the responsibilities of the group managing director and of the person in overall charge of the group’s Indonesian operations. On that basis, the group expects that, whilst UK executive functions may well be further reduced, the group managing director will remain based in the UK for the foreseeable future. 50 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 51 Under the company’s articles of association, any director who has not been appointed or re-appointed at each of the preceding two annual general meetings shall retire by rotation and may submit himself for re-election. This has the effect that each director is subject to re-election at least once every three years. In addition, in compliance with the Code, non- executive directors who have served on the board for more than nine years submit themselves for re-election every year. Further, any director appointed during the year holds ofﬁce until the next annual general meeting and may then submit himself or herself for re-election. It is the policy of the company that the board should be refreshed on the basis that independent non-executive directors will not normally be proposed for reappointment if, at the date of reappointment, they have served on the board for more than nine years. Directors’ conﬂicts of interest In connection with the statutory provisions regarding the avoidance by directors of situations which conﬂict or may conﬂict with the interests of the company, the board has approved the continuance of potential conﬂicts notiﬁed by Richard Robinow, who absented himself from the discussion in this respect. Such notiﬁcations relate to Richard Robinow’s interests as a shareholder in or a director of companies the interests of which might conﬂict with those of the group but are not at present considered to do so. No other conﬂicts or potential conﬂicts have been notiﬁed by directors. Professional development and advice In view of their previous relevant experience and, in some cases, length of service on the board, all directors are familiar with the ﬁnancial and operational characteristics of the group’s activities. Directors are required to ensure that they maintain that familiarity and keep themselves fully cognisant of the affairs of the group and matters affecting its operations, ﬁnances and obligations (including environmental, social and governance responsibilities). Whilst there are no formal training programmes, the board regularly reviews its own competences, receives periodic brieﬁngs on legal, regulatory, operational and political developments affecting the group and may arrange training on speciﬁc matters where it is thought to be required. Directors are able to seek the advice of the company secretary and, individually or collectively, may take independent professional advice at the expense of the company if necessary. Newly appointed directors receive induction on joining the board and steps are taken to ensure that they become fully informed as to the group’s activities. Information and support Monthly operational and ﬁnancial reports are issued to all directors for their review and comment. These reports are augmented by monthly management reports, annual budgets and positional papers on matters of a non routine nature and by prompt provision of such other information as the board periodically decides that it should have to facilitate the discharge of its responsibilities. Board evaluation A formal internal evaluation of the performance of the board, the committees and individual directors is undertaken annually. Balance of powers, contribution to strategy, efﬁcacy and accountability to stakeholders are reviewed by the board as a whole and the performance of the chairman is appraised by the independent non-executive directors led by the senior independent director. The appraisal process includes assessments against a detailed set of criteria covering a variety of matters from the commitment and contribution of the board in developing strategy and enforcing disciplined risk management, pursuing areas of concern, if any, and setting appropriate commercial and social responsibility objectives to the adequacy and timeliness of information made available to the board. At the performance evaluation conducted in 2017, the board concluded that it performs effectively as constituted and that the directors communicate and work well together as a team. Board committees The board has appointed audit, nomination and remuneration committees to undertake certain of the board’s functions, with written terms of reference which are available for inspection on the company’s website and are updated as necessary. The directors are conscious that the board committees do not meet the independence criteria speciﬁed by the Code. This reﬂects the desire to maintain a board of a size that is appropriate to the needs and circumstances of the company, to retain a suitable balance between independence and recent and relevant ﬁnancial or industry experience on each committee and to avoid unnecessary duplication of the oversight exercised by the commissioners of PT REA Kaltim Plantations (the Indonesian sub-holding company of all of the group’s plantation interests) of which a majority are independent. The board considers that the independence of judgement of the audit, nomination and remuneration committees is not compromised as a consequence of their current composition. There is an executive committee of the board, currently comprising any two of David Blackett, Carol Gysin and Richard Robinow, to deal with various matters of a routine or executory nature. Audit committee The audit committee reports on its composition and activities in the “Audit committee report” below. This also provides information concerning the committee’s relationship with the external auditor. R.E.A. Holdings plc Annual Report and Accounts 2017 51 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 52 Governance Corporate governance report continued Nomination committee The nomination committee comprises David Blackett (chairman) and Michael St. Clair-George. The committee is responsible for submitting recommendations for the appointment of directors for approval by the full board. In making such recommendations, the committee pays due regard to the group’s diversity policy and takes into consideration the ethos of the company and the speciﬁc nature and location of the group operations. Experience and understanding of the plantation industry and business in Indonesia is an important factor in considering a potential appointment. Remuneration committee The remuneration committee reports on its composition and activities in the “Directors’ remuneration report” below. This also provides information concerning the remuneration of the directors and includes details of the basis upon which such remuneration is determined. Board proceedings Four meetings of the board are scheduled each year. Other board meetings are held as required to consider corporate and operational matters with all directors consulted in advance regarding signiﬁcant matters for consideration and provided with relevant supporting information. Minutes of board meetings are circulated to all directors. The managing director, unless travelling, is normally present at full board meetings. Where appropriate, telephone discussions take place between the chairman and the other non-executive directors outside the formal meetings. Committee meetings are held as and when required. All proceedings of committee meetings are reported to the full board. The attendance of individual directors, who served during 2017, at the regular board meetings held in 2017 is set out below. There were no ad hoc meetings held in 2017. Regular meeting David Blackett 4 Irene Chia 4 Carol Gysin 4 John Oakley 4 Mark Parry (resigned 20 February 2017) 0 Richard Robinow 4 Michael St. Clair-George 4 In addition, during 2017 there were three meetings of the audit committee, two meetings of the remuneration committee and one meeting of the nomination committee. All committee meetings were attended by all of the committee members appointed at the time of each meeting. Whilst all formal decisions are taken at board meetings, the directors have frequent informal discussions between themselves and with management and most decisions at board meetings reﬂect a consensus that has been reached ahead of the meetings. One of the directors resides permanently in the Asia Paciﬁc region and some UK based directors travel extensively. Since the regular board meetings are ﬁxed to ﬁt in with the company’s budgeting and reporting cycle and ad hoc meetings normally have to be held at short notice to discuss speciﬁc matters, it may not always be practical to ﬁx meeting dates to ensure that all directors are able to attend each meeting. In the event that a director is unable to attend a meeting, the company ensures that the director concerned is fully briefed so that the director’s views can be made known to other directors ahead of time and be reported to, and taken into account, at the meeting. Risk management and internal control The board is responsible for the group’s system of internal control and for reviewing its effectiveness. The system is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The board has established a continuous process for identifying, evaluating and managing the principal risks which the group faces (including risks arising from environmental, social and governance matters) and considering any such risks in the context of the group’s overall strategic objectives. The board regularly reviews the process and internal control systems, which were in place throughout 2017 and up to the date of approval of this report, in accordance with the Financial Reporting Council (“FRC”) Guidance on Risk Management, Internal Control and Related Financial and Business Reporting. The board attaches importance not only to the process established for controlling risks but also to promoting an internal culture in which all group staff are conscious of the risks arising in their particular areas of activity, are open with each other in their disclosure of such risks and combine together in seeking to mitigate risk. In particular, the board has always emphasised the importance of integrity and ethical dealing and continues to do so, in accordance with the group’s policies on business ethics and human rights. Policies and procedures in respect of diversity and anti bribery and corruption are in place for all of the group’s operations in Indonesia as well as in the UK. These include detailed guidelines and reporting requirements, a comprehensive continuous training programme for all management and employees and a process for on-going monitoring and review. In particular, as regards the group’s diversity policy, the group’s objective is to encourage an open approach to recruitment, promotion and career development irrespective of age, gender, national origin or professional background. Applicable policies are designed to recognise this open approach. Substantial progress has been made in implementing the diversity policy as evidenced by the composition of the group board, Indonesian subsidiary boards and senior management. 52 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 53 Further analysis is forthcoming in respect of the current reporting period. The group also seeks to ensure that its partners abide by its ethical principles, including those with respect to slavery as set out in the policy on human rights. The board is in compliance with the Modern Slavery Act 2015 and has a statement on its website in relation to modern slavery. Furthermore the group has initiated measures to ensure that it is compliant with the General Data Protection Regulation (“GDPR”) which comes into effect on 25 May 2018. The board, assisted by the audit committee and the internal audit process, reviews the effectiveness of the group’s system of internal control on an on-going basis. The board’s monitoring covers all controls, including ﬁnancial, operational and compliance controls and risk management. It is based principally on reviewing reports from management (providing such information as the board requires) and considering whether signiﬁcant risks are identiﬁed, evaluated, managed and controlled and whether any signiﬁcant weaknesses are promptly remedied or indicate a need for more extensive monitoring. Details of the internal audit function are provided under “Internal audit” in the “Audit committee report” below. As discussed under “Risk management and internal control” in the “Audit committee report” below, the group has commissioned a third party review of its Information Technology control and ﬁnancial reporting system to ensure compliance with best practice. Following formal reviews of the systems of internal control and risk management (including the group’s internal audit arrangements) in April 2017, the board concluded that otherwise these remain effective and sufﬁcient for their purpose. Internal audit and reporting The group’s internal audit arrangements are described in the Audit committee report below. The group has established a management hierarchy which is designed to delegate the day to day responsibility for speciﬁc departmental functions within each working location, including ﬁnancial, operational and compliance controls and risk management, to a number of senior managers and department heads who in turn report to the managing director. Management reports to the audit committee and the board on a regular basis by way of the circulation of progress reports, management reports, budgets and management accounts. Management is required to seek authority from the board in respect of any transaction outside the normal course of trading which is above an approved limit and in respect of any matter that is likely to have a material impact on the operations that the transaction concerns. Monthly meetings to consider operational matters are held in London and Indonesia and regular meetings are held between the two ofﬁces by way of conference calls. Directors based in London make frequent visits to the overseas operations each year. The managing director has a continuous dialogue with the chairman and with other members of the board. Relations with shareholders The “Chairman’s statement” and “Strategic report” above, when read in conjunction with the ﬁnancial statements, the “Directors’ report” above and the “Audit committee report” and “Directors’ remuneration report” below are designed to present a comprehensive and understandable assessment of the group’s position and prospects. The respective responsibilities of the directors and auditor in connection with the ﬁnancial statements are detailed in “Directors’ responsibilities” below and in the “Auditor’s report”. The directors endeavour to ensure that there is satisfactory dialogue, based on mutual understanding, between the company and its shareholder body. The annual report, interim communications, periodic press releases and such circular letters to shareholders as circumstances may require are intended to keep shareholders informed as to progress in the operational activities and ﬁnancial affairs of the group. In addition, within the limits imposed by considerations of conﬁdentiality, the company engages with institutional and other major shareholders through regular meetings and other contact in order to understand their concerns. The views of shareholders are communicated to the board as a whole to ensure that the board maintains a balanced understanding of shareholder opinions and issues arising. All ordinary shareholders may attend the company’s annual and other general meetings and put questions to the board. As noted above, one director resides permanently in the Asia Paciﬁc region and the nature of the group’s business requires that other directors travel frequently to Indonesia. It is therefore not always feasible for all directors to attend general meetings, but those directors who are present are available to talk on an informal basis to shareholders after the meeting’s conclusion. At least twenty working days’ notice is given of the annual general meeting and related papers are made available to shareholders at least twenty working days ahead of the meeting. For every general meeting, proxy votes are counted and details of all proxies lodged for each resolution are reported to the meeting and made available on the company’s website as soon as practicable after the meeting. The company maintains its website at “www.rea.co.uk”. The website has detailed information on, and photographs illustrating various aspects of, the group’s activities, including its commitment to sustainability, conservation work and managing its carbon footprint. The website is updated regularly and includes information on the company’s share prices and the price of crude palm oil. The company’s results and other news releases issued via the London Stock Exchange’s Regulatory News Service are published on the “Investors” section of the website and, together with other relevant documentation concerning the company, are available for downloading. Approved by the board on 26 April 2018 and signed on behalf of the board by DAVID J BLACKETT Chairman R.E.A. Holdings plc Annual Report and Accounts 2017 53 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 54 Governance Audit committee report Summary of the role of the audit committee Composition of the audit committee The audit committee currently comprises Michael St. Clair- George (chairman) and David Blackett both of whom are considered by the directors to have relevant ﬁnancial and professional experience, as well as experience of the business sector and region in which the company operates, in order to be able to fulﬁl their speciﬁc duties with respect to the audit committee. Meetings Three audit meetings are scheduled each year to match the company’s budgeting and reporting cycle. There are additional ad hoc meetings held to discuss speciﬁc matters when required. Signiﬁcant issues related to the ﬁnancial statements The committee reviewed the half year ﬁnancial statements to 30 June 2017 (on which the auditor did not report) and the full year consolidated ﬁnancial statements for 2017 (the “2017 ﬁnancial statements”) contained in this annual report. The external audit report on the latter was considered together with a paper to the committee by the auditor reporting on the principal audit ﬁndings. The audit partner of Deloitte LLP responsible for the audit of the group attended the audit planning meeting prior to the year end as well as the meeting of the committee at which the full year audited consolidated ﬁnancial statements were considered and approved. Senior members of staff of Deloitte LLP who were involved in the audit also attended the meetings. In relation to the group’s audited 2017 ﬁnancial statements, the committee considered the signiﬁcant accounting and judgement issues set out below. The terms of reference of the audit committee are available for download from the company’s website at www.rea.co.uk. The audit committee is responsible for: • • • • monitoring the integrity of the ﬁnancial statements, reviewing formal announcements of ﬁnancial performance and the signiﬁcant reporting issues and judgements that such statements and announcements contain; reviewing the effectiveness of the internal control functions (including the internal ﬁnancial controls and internal audit function in the context of the company’s overall risk management system, as well as arrangements whereby internally raised staff concerns as to ﬁnancial reporting and other relevant matters are considered); making recommendations to the board in relation to the appointment, reappointment, removal, remuneration and terms of engagement of the external auditor, and overseeing the relationship with and reviewing the audit ﬁndings of the external auditor; and reviewing and monitoring the independence of the external auditor and the effectiveness of the audit process. The audit committee also monitors the engagement of the external auditor to perform non-audit work. During 2017, the only non-audit work undertaken by the auditor was, as in the previous year, routine compliance reporting in connection with covenant obligations applicable to certain group loans (as respects which the governing instruments require that such compliance reporting is carried out by the auditor) and routine taxation compliance services. The audit committee considered that the nature and scope of, and remuneration payable in respect of, these engagements were such that the independence and objectivity of the auditor was not impaired. Fees payable are detailed in note 9 to the consolidated ﬁnancial statements. The members of the audit committee discharge their responsibilities by formal meetings and informal discussions between themselves, meetings with the external auditor, with the internal auditor in Indonesia and with management in Indonesia and London and by consideration of reports from management, the Indonesian internal audit function and the external auditor. The committee provides advice and recommendations to the board with respect to the ﬁnancial statements to ensure that these offer fair, balanced and comprehensive information for the purpose of informing and protecting the interests of the company’s shareholders. 54 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 55 Governance Audit committee report Signiﬁcant accounting and judgement issues Issues Relevant considerations Assets held for sale: where directors decide to seek purchasers for non-current assets or a disposal group they are required by IFRS 5 Non-current assets held for sale and disposal groups to determine the point at which such assets should be classiﬁed as held for sale and disclosed in the group ﬁnancial statements at the lower of its carrying value or fair value less costs to sell. The directors have reviewed the principal sequence of events which culminated on 25 April 2018 with the execution of a conditional sale agreement for one of the group’s Indonesian plantation subsidiary companies (PT Putra Bongan Jaya) and concluded that at 31 December 2017 its sale was not highly probable and that it did not therefore qualify as an asset held for sale. Biological assets: compliance with IAS 41 Agriculture, as amended, requiring that produce growing on bearer plants, if capable of reliable measurement, be treated as a separate asset and carried at fair value. The group has continued, in the interest of consistency, to apply the same formulaic methodology for valuing growing produce based on oil content in growing fresh fruit bunches. Indonesian tax balances: from time to time the group ﬁnds itself in dispute with the Indonesian tax authorities over the interpretation of Indonesian tax legislation. Certain disputed items are currently the subject of cases in appeal courts. Valuation of stone and coal loans: the value of these loans is based on their expected future generation of revenue; following a review in 2012, a provision of $3.0 million was booked in the 2012 consolidated ﬁnancial statements. Each year the group prepares an evaluation of items that may be disputed and adjusts tax balances as required. Two long disputed cases which had been found in the group’s favour in past years remain subject to judicial review by the Supreme Court of Indonesia, which may take some years. In response to disputed tax assessments raised in earlier years, it has been the policy of the group to pay voluntarily the disputed amounts in order to minimise the extent of interest and penalties in the event that the group was wholly or partially unsuccessful in its appeals. Following successful appeals, the tax authorities have only repaid interest on that part of the disputed assessment where tax had been paid in compliance with usual advance payment procedures; only such interest has been credited to income. Meanwhile, a subsidiary has lodged an appeal with the Supreme Court to recover the disputed interest, claims for which have been rejected by the lower courts. An Indonesian subsidiary is also in dispute with the tax authorities over the tax residence of a UK subsidiary; the Indonesian subsidiary is defending its position robustly. The group has made further progress towards resumption of its stone and coal extraction activities. At Kota Bangun, the group has acquired a company with port facilities on the Mahakam River immediately adjacent to the concession and has applied for the necessary licences to export coal. A potential buyer of the coal stockpile of some 16,000 tonnes has been identiﬁed, as well as a contractor to begin the rehabilitation of the mine as a preliminary to resuming coal extraction. A group subsidiary is now taking delivery of shipments of limestone from a nearby deposit. The group continues to review options for developing suitable road access to the andesite stone concession. Meanwhile, current feasibility studies indicate that the value of such operations signiﬁcantly exceeds the loan values and support the conclusion that no further impairment charge is required. R.E.A. Holdings plc Annual Report and Accounts 2017 55 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 56 Governance Audit committee report continued Signiﬁcant accounting and judgement issues Issues Relevant considerations Revenue recognition: compliance with the “bill and hold” sale revenue recognition requirements of IAS18 “Revenue” and those relating to forward sales. Depreciation of land: the group has reviewed the estimated economic life of its non-current plantation operating assets with a view to applying appropriate depreciation rates. There are long-standing operating procedures for the storage of product where the buyer has requested a delivery delay, and these comply with IFRS. In addition, the shift of delivery method over recent years from FOB Samarinda to CIF has reduced the occurrence and the materiality of this issue. Any forward sales made by the group are priced relevant to benchmarks at the time of delivery and so are not at ﬁxed prices. In particular, the committee has studied the Indonesian land tenure law and regulation as applied to oil palm plantations. The system of awarding land certiﬁcates (an “hak guna usaha” or “HGU”) grants HGUs for an initial long period of time (35 years) and these can be renewed relatively easily and at minimal cost for further periods of up to 60 years. All land rights in the past have always been generally renewed without issues. Although the current framework is silent on whether further extensions will be allowed it is the working assumption of the industry in Indonesia, when considering such matters as extension planting, that the current HGUs will be extendible when the time comes. Land suitable for oil palm development and subject to HGUs can be readily bought and sold. Indonesian accounting standards prescribe that the costs associated with acquiring and licensing such land may not be depreciated. Based on these and other considerations, the committee has recommended to the directors that the group no longer depreciates its land titles. This recommendation constitutes a reappraisal of the economic lives of the land titles, not a change of accounting policy; accordingly, there is no change to the accumulated depreciation at 1 January 2017. This is consistent with the practice of other European groups with oil palm plantations in Indonesia. The committee will monitor applicable accounting standards and Indonesian law and regulation which could have an impact on the assessment of the economic lives of the land titles. 56 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 57 In its review of the annual report and the consolidated ﬁnancial statements, the committee considered management’s submissions on the matters above, together with the conclusions reached by the auditor, in order to ensure that the annual report and the consolidated ﬁnancial statements are fair, balanced and understandable and provide sufﬁcient information to enable shareholders to make an assessment of the group’s performance, business model and strategy. External audit The external auditor was appointed as the company’s external auditor in 2002. There has been no tender for audit services since that time. In accordance with the EU Audit Directive and Audit Regulation, consideration will be given to tendering for future audits in due course. Colin Rawlings has been the company’s audit engagement partner since June 2015. The audit committee has recommended to the board that it should seek the approval of the company’s shareholders for the reappointment of the company’s current auditor. That recommendation reﬂects an assessment of the qualiﬁcations, expertise, resources and independence of the auditor based upon reports produced by the auditor, the committee’s own dealings with the auditor and feedback from management. The committee took into account the possibility of the withdrawal of the auditor from the market and noted that there were no contractual obligations to restrict the choice of external auditor. However, given the current level of audit fees, the limited choice of audit ﬁrms with sufﬁcient international coverage and experience and the costs that a change would be likely to entail, the committee did not recommend that the company’s audit be put out to tender. In its assessment of the external auditor, the audit committee considered the following criteria: • • • • • delivery of a thorough and efﬁcient audit of the group in accordance with agreed plans and timescales provision of accurate, relevant and robust advice on key accounting and audit judgements, technical issues and best practice the degree of professionalism and expertise demonstrated by the audit staff sufﬁcient continuity within the core audit team adherence to independence policies and other regulatory requirements. Risk management and internal control The board of the company has primary responsibility for the group’s risk management and internal control systems. The audit committee supervises the internal audit function, which forms a key component of the control systems, and keeps the systems of ﬁnancial, operational and compliance controls generally under review. Any deﬁciencies identiﬁed are drawn to the attention of the board. During the past few years the group has been upgrading its information technology (IT) systems both as regards the management of the plantation operations and their integration into the group’s new accounting and reporting functions, which went live during 2017. The committee has become aware that, following implementation, the IT access and control systems and procedures (which had had to accommodate many users during the development and implementation stages) require to be signiﬁcantly strengthened and the group is now actively engaged on such work. Separately the group has recently commissioned an independent review of such controls and procedures to ensure compliance with best practice and with the Financial Reporting Council’s code on Internal Control Management. Internal audit The group’s Indonesian operations have a fully staffed in- house internal audit function supplemented where necessary by the use of external consultants. The function issues a full report on each internal audit topic and a summary of the report is issued to the audit committee. An internal audit programme is agreed at the beginning of each year and supplemented by special audits through the year as and when required by management. In addition, follow-up audits are undertaken to ensure that the necessary remedial action has been taken. In the opinion of the audit committee and the board, there is no need for an internal audit function outside Indonesia due to the limited nature of the non-Indonesian operations. Approved by the audit committee on 26 April 2018 and signed on behalf of the committee by: MICHAEL A ST. CLAIR-GEORGE Chairman O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 57 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 58 Governance Directors’ remuneration report This report has been prepared in accordance with Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (the “Regulations”) as amended in August 2013. The report is split into three main sections: the statement by the chairman of the remuneration committee, the annual report on remuneration and the policy report. The annual report on remuneration provides details of directors’ remuneration during 2017 and certain other information required by the Regulations. The overall report, excluding the policy report, will be put to an advisory shareholder vote at the company’s 2018 annual general meeting. The remuneration policy detailed in the policy report is separately subject to approval at that annual general meeting but is unchanged from the policy that was previously approved at the company’s 2015 annual general meeting. The Companies Act 2006 requires the auditors to report to shareholders on certain parts of the annual report on remuneration and to state whether, in their opinion, those parts of the report have been properly prepared in accordance with the Regulations. The parts of the annual report on remuneration that have been audited are indicated in that report. The statement by the chairman of the remuneration committee and the policy report are not subject to audit. Statement by Michael St. Clair-George, chairman of the remuneration committee The succeeding sections of this directors’ remuneration report cover the activities of the remuneration committee during 2017 and provide information regarding the remuneration of executive and non-executive directors. In particular, the report is designed to compare the remuneration of directors with the performance of the company. The policy and principles applied by the remuneration committee in ﬁxing the remuneration of executive directors takes account of the company’s commercial goals and achievements as well as its sustainability objectives. In considering bonuses in respect of 2017, the committee conﬁrmed the importance of striking an appropriate balance between positive and negative factors. In particular, the committee took note of the progress made in improving operational performance in 2017, following on from the sub-optimal performance in 2016, albeit that the recovery to former standards is taking time to achieve given the extent of remedial action required across the group’s operations. The committee also recognised the successful reorganisation of local management during 2017 and the enhanced oversight of the operations and improved performance and efﬁciencies that this was facilitating. The committee reﬂected these factors in awarding bonuses in respect of 2017 and setting the executive remuneration and speciﬁc objectives for 2018. The committee believes that remuneration should continue to motivate and reward individual performance in a way that is consistent with the best long term interests of the company and its shareholders, and, in approving remuneration packages for 2018, considers that it struck an appropriate balance between reward and incentive. Annual report on remuneration The information provided below under “Single total ﬁgure of remuneration for each director”, “Pension entitlements”, “Scheme interests awarded during the ﬁnancial year”, “Directors’ shareholdings” and “Scheme interests” has been audited. 58 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 59 Single total ﬁgure of remuneration for each director The remuneration of the executive and non-executive directors for 2016 and 2017 was as follows (stated in sterling as all the directors are remunerated in sterling). There was no remuneration in respect of any long term incentive plan in 2017. Salary All taxable Annual Other and fees benefits * bonus** remuneration Total 2017 £’000 £’000 £’000 £’000 £’000 Managing director C E Gysin (appointed 21 February 2017) 312.9 6.1 81.3 – 400.3 M A Parry (resigned 20 February 2017) 181.9 30.9 – 200.0 412.8 Chairman and non-executive directors D J Blackett 100.0 – – – 100.0 I Chia 27.0 – – – 27.0 J C Oakley 82.0 18.0 – – 100.0 R M Robinow 100.0 6.5 – – 106.5 M A St. Clair-George 29.5 – – – 29.5 Total 833.3 61.5 81.3 200.0 1,176.1 Salary All taxable Annual Long term and fees benefits * bonus** incentive Total 2016 £’000 £’000 £’000 £’000 £’000 Managing director M A Parry 425.1 91.2 101.0 – 617.3 Chairman and non-executive directors D J Blackett 100.0 – – – 100.0 I Chia 27.0 – – – 27.0 D H R Killick (retired 6 June 2016) 14.8 – – – 14.8 J C Oakley 90.0 19.3 – – 109.3 R M Robinow 100.0 7.2 – – 107.2 M A St. Clair-George (appointed 24 October 2016) 5.6 – – – 5.6 Total 762.5 117.7 101.0 – 981.2 * Types of beneﬁt: company car, medical insurance, overseas rental accommodation ** In respect of the applicable year (awarded in the subsequent year) Fees paid to Michael St Clair George and David Killick included additional remuneration at the rate of £2,500 per annum in respect of their membership of the audit committee but reduced in 2016 on a pro rata basis to reﬂect the period of that year during which they served as directors. Pension entitlements In the past, executive directors were eligible to join the R.E.A. Pension Scheme, a deﬁned beneﬁt scheme of which details are given in note 37 to the consolidated ﬁnancial statements. That scheme is now closed to new members and it is no longer the policy of the company to offer pensionable remuneration to directors, except to the extent as may be or may become required under local legislation. Mr Oakley (who was aged 69 at 31 December 2017) is a pensioner member of the scheme. Details of Mr Oakley’s annual pension entitlement are set out below. £ In payment at beginning of year 75,095 Increase during the year 871 In payment at end of year 75,966 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 59 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 60 Governance Directors’ remuneration report continued Scheme interests awarded during the ﬁnancial year There were no scheme interests awarded during the ﬁnancial year. Upon the resignation of Mark Parry on 20 February 2017, all scheme interests previously awarded to Mr Parry under the Long Term Incentive scheme lapsed. Payment for loss of ofﬁce Pursuant to a resolution approved by the company shareholders at the 2017 Annual General Meeting, Mark Parry, following his resignation on 20 February 2017, received an ex gratia payment of £200,000 and a contribution of £15,000 plus VAT towards reasonable legal fees incurred by him with regard to these arrangements. Directors’ shareholdings There is no requirement for directors to hold shares in the company. At 31 December 2017, the interests of directors (including interests of connected persons as deﬁned in section 96B (2) of the Financial Services and Markets Act 2000 of which the company is, or ought upon reasonable enquiry to have been, aware) in the 9 per cent cumulative preference shares of £1 each and the ordinary shares of 25p each of the company were as set out in the table below. Preference Ordinary Directors shares shares D J Blackett 250,600 10,000 I Chia – 1,000 C E Gysin (appointed 21 February 2017) 91,957 1,132 J C Oakley – 442,493 R M Robinow – 11,082,420 M A St. Clair-George (appointed 24 October 2016) 2,108 10,149 There have been no changes in the interests of the directors between 31 December 2017 and the date of this report. Scheme interests No director currently holds any scheme interests in ordinary shares. A long term incentive plan (the “2015 plan”) was approved by shareholders in June 2015. The 2015 plan is linked to the market price performance of ordinary shares in the company, designed with a view to participation over the long term in value created for the group. Under the 2015 plan, participants are awarded potential entitlements over notional ordinary shares of the company. These potential entitlements then vest to an extent that is dependent upon the achievement of certain targets. Vested entitlements are exercisable in whole or part at any time within the six years following the date upon which they vested. On exercising a vested entitlement, a participant receives a cash amount for each ordinary share over which the entitlement is exercised, equal to the excess (if any) of the market price of an ordinary share on the date of exercise over the price at which the entitlement was granted, subject to adjustment for subsequent variations in the share capital of the company in accordance with the rules of the plan. The plan provides that the vesting of the participant’s potential entitlements to notional ordinary shares be determined by key performance targets with each performance target measured on a cumulative basis over a designated performance period. Targets for any award made under the 2015 plan are subject to adjustment at the discretion of the remuneration committee where, in the committee’s opinion, warranted by actual performance. The exercise of vested entitlements depends upon continued employment with the group. If the participant leaves, he may exercise a vested entitlement within six months of leaving. In the event of a change in control of the company as a result of a takeover offer or similar corporate event, vested entitlements would be exercisable for a period of one month following the date of the change of control or other relevant event (as determined by the remuneration committee). 60 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 61 Performance graph and managing director remuneration table The following graph shows the company’s performance, measured by total shareholder return, compared with the performance of the FTSE All Share Index also measured by total shareholder return. The FTSE All Share index has been selected for this comparison as there is no index available that is speciﬁc to the activities of the company. 450 400 350 300 250 200 150 100 50 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 R.E.A FTSE Record of remuneration of the managing director The table below provides details of the remuneration of the managing director over the ﬁve years to 31 December 2017. Long term incentive Annual bonus vesting rates Single figure of pay-out against total against maximum remuneration maximum opportunity Managing director’s remuneration £’000 % % 2017 C E Gysin (for the period 21 February to 31 December 2017) 400.3 100 N/A 2017 M A Parry (for the period 1 January to 20 February 2017) 412.8 N/A N/A 2016 M A Parry 617.3 92 N/A 2015 M A Parry 541.7 88 N/A 2015 J C Oakley 473.9 60 N/A 2014 J C Oakley 453.3 67 N/A 2013 J C Oakley 488.8 65 N/A Percentage change in remuneration of the managing director The table below shows the percentage changes in the remuneration of the managing director and in the average remuneration of certain senior management and executives in Indonesia and Singapore between 2016 and 2017. The selected comparator employee group is considered to be the most relevant taking into consideration the nature and location of the group’s operations. Using the entire employee group would involve comparison with a workforce in Indonesia, whose terms and conditions are substantially different from those pertaining to employment in the UK and Singapore of which the changes from year to year reﬂect local employment conditions. In order to achieve a meaningful comparison, the 2016 remuneration of the selected comparator employee group has been restated to reﬂect only the remuneration in that year of those employees comprising the 2017 selected comparator employee group. The 2016 remuneration of the selected group has also been restated at prevailing average exchange rates for 2017 so as to eliminate distortions based on exchange rate movements of the Indonesian rupiah, US dollar and Singapore dollar against sterling. R.E.A. Holdings plc Annual Report and Accounts 2017 61 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 62 Governance Directors’ remuneration report continued Mark Parry (resigned 20 February 2017) and Carol Gysin (appointed 21 February 2017) 2017 2016 change Percentage change in managing director’s remuneration £’000 £’000 % Salary 338.2 425.1 (20) Benefits 13.0 91.2 (86) Annual bonus 81.3 101.0 (20) Total 432.5 617.3 (30) The 2017 remuneration above is the aggregate of Mark Parry’s remuneration for one month and Carol Gysin’s remuneration for 11 months. The remuneration for the purpose of the table excludes the loss of ofﬁce payment to Mark Parry of £200,000. Percentage change in selected employee group remuneration £’000 £’000 % Salary 241.5 168.2 44 Benefits 9.7 6.8 43 Annual bonus 34.9 48.7 (28) Total 286.1 223.7 28 Relative importance of spend on pay The graph below shows the movements between 2016 and 2017 in total employee remuneration, cost of goods sold and ordinary and preference dividends. Cost of goods sold has been selected as an appropriate comparator as it provides a reasonable measure of the growth in the group’s activities. $’000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 20% 30% 2016 2017 Total employee remuneration 2016 2017 Cost of goods sold 2016 2017 Ordinary and preference dividends 5% Functions of the remuneration committee The remuneration committee currently comprises two independent non-executive directors, Michael St. Clair-George (chairman) and David Blackett. The committee sets the remuneration and beneﬁts of the executive directors. The committee is also responsible for long term incentive arrangements, if any, for key senior executives in Indonesia. The committee does not use independent consultants but takes into consideration external guidance, including the annual publication by Deloitte LLP regarding directors’ remuneration in smaller companies. The chairman plays no part in the discussion of his own remuneration, which is a matter for determination between the other member of the committee and fellow directors. 62 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 63 Service contracts of directors standing for re-election David Blackett, John Oakley and Richard Robinow are proposed for re-election or election, as applicable, at the forthcoming annual general meeting. All the non-executive directors have a contract for services to the company which is terminable at will by either party. Continuation of their appointment depends upon satisfactory performance and re-election at annual general meetings in accordance with the articles of association of the company. Statement of voting at general meeting At the annual general meeting held on 12 June 2017, votes lodged by proxy in respect of the resolution to approve the 2016 directors’ remuneration report were as follows: Votes Percentage Votes Percentage Total Votes for for against against votes cast withheld Voting on remuneration report 29,862,991 99.99 275 0.01 29,886,447 0 The company pays due attention to voting outcomes. Where there are substantial votes against resolutions in relation to directors’ remuneration, the reasons for any such vote will be sought, and any actions in response will be detailed in the next directors’ remuneration report. Policy Report The information provided in this part of the directors’ remuneration report is not subject to audit. The remuneration policy detailed below is subject to approval at the company’s 2018 annual general meeting on 13 June 2018 in accordance with the Companies Act 2006 (Strategic Report and Directors Report) Regulations 2013 requiring all companies to put their remuneration policy to shareholders for approval at least every three years. The policy proposed for approval is unchanged from the policy approved by shareholders at the company’s 2015 annual general meeting. The remuneration of directors approved in respect of 2018 is consistent with this policy. Future policy tables The table below provides a summary of the key components that it will in future be the policy of the company to provide in the remuneration package of each executive director. It is not the policy of the company to provide for possible recovery after payment of directors’ remuneration except in respect of awards, if any, under the 2015 long term incentive plan. Purpose Operation Opportunity Executive directors Applicable performance measures Within the second or third quartile for similar sized companies None Salary and fees To provide a competitive level of ﬁxed remuneration aligned to market practice for comparable organisations, reﬂecting the demands, seniority and location of the position and the expected contribution to achievement of the company’s strategic objectives Reviewed annually with annual increases effective from 1 January by reference to: the rate of inﬂation, speciﬁc responsibilities and location of the executive, current market rates for comparable organisations, rates for senior employees and staff across the operations, and allowing for differences in remuneration applicable to different geographical locations O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 63 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 64 Governance Directors’ remuneration report continued Purpose Operation Opportunity Applicable performance measures Executive directors Taxable beneﬁts To attract, motivate, retain and reward fairly individuals of suitable calibre Annual bonus To incentivise performance over a 12 month period, based on achievements linked to the company’s strategic objectives Company car; and, where relevant, other beneﬁts customarily provided to equivalent senior management in their country of residence Annual review of performance measured against prior year progress in corporate development, both commercial and ﬁnancial, and including objectives relating to sustainability and governance None The cost of providing the appropriate beneﬁts, subject to regular review to ensure that such costs are competitive Up to a maximum of 50 per cent of annual base salary Long term incentives To provide incentives, linked to ordinary shares, with a view to participation by the director over the long term in the value that a director helps to create for the group The grant of rights to acquire shares or to receive cash payments vesting by reference to the achievement over a deﬁned period of certain key performance targets Cumulative unvested awards, measured at face value on dates of grant, limited to 150 per cent of prevailing annual base salary (200 per cent in exceptional circumstances) A range of objectives for the respective director, reﬂecting speciﬁc goals for the relevant year, with weighting assessed annually on a discretionary basis depending upon the dominant inﬂuences during the year to which a bonus relates Total shareholder return, cost per tonne of crude palm oil produced, and the annual extension planting rate achieved in proportions considered at the remuneration committee’s discretion appropriate to the company’s objectives at the time of making any award Pensions Compliance with prevailing legislation Compliance with prevailing legislation Compliance with prevailing legislation None Non-executive directors Fees To attract and retain individuals with suitable knowledge and experience to serve as directors of a listed UK company engaged in the plantation business in Indonesia Fees for additional duties An additional ﬂat fee in each year in respect of membership of certain committees and additional fees in respect of particular services performed Taxable beneﬁts Continuance of previously agreed arrangements Determined by the board within the limits set by the articles of association and by reference to comparable organisations and to the time commitment expected; reviewed annually Determined by the board having regard to the time commitment expected and with no director taking part in the determination of such additional remuneration in respect of himself; reviewed annually The provision of private medical insurance, subject to regular review to ensure that the cost is competitive 64 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 65 The policies on remuneration set out above in respect of executive directors are applied generally to the senior management and executives of the group but adjusted appropriately to reﬂect the position, role and location of an individual. Remuneration of other employees, almost all of whom are based in Indonesia, is based on local and industry benchmarks for basic salaries and beneﬁts, subject as a minimum to an annual inﬂationary adjustment, and with additional performance incentives as and where this is appropriate to the nature of the role. Where any arrangements have been agreed with a director within the existing policies on remuneration, such arrangements shall be deemed to be arrangements falling within the new policy on remuneration set out above. Approach to recruitment remuneration In setting the remuneration package for a newly appointed executive director, the committee will apply the policy set out above. Base salary and bonuses, if any, will be set at levels appropriate to the role and the experience of the director being appointed and, together with any beneﬁts to be included in the remuneration package, will also take account of the geographical location in which the executive is to be based. The maximum variable incentive which may be awarded by way of annual bonus will be 50 per cent of the annual base salary and by way of long term incentive will be 150 per cent of annual base salary, except in exceptional circumstances when the maximum long term incentive would be 200 per cent of annual base salary. In instances where a new executive is to be domiciled outside the United Kingdom, the company may provide certain relocation beneﬁts to be determined as appropriate on a case by case basis taking account of the speciﬁc circumstances and costs associated with such relocation. Directors’ service agreements and letters of appointment The company’s policy on directors’ service contracts is that contracts should have a notice period of not more than one year and a maximum termination payment not exceeding one year’s salary. No director has a service contract that is not fully compliant with this policy. Contracts for the services of non-executive directors may be terminated at the will of either party, with fees payable only to the extent accrued to the date of termination. Continuation of the appointment of each non-executive director depends upon satisfactory performance and re-election at annual general meetings in accordance with the articles of association of the company and the provisions of the UK Corporate Governance Code. Carol Gysin’s service agreement, effective from 1 February 2017, states that the appointment shall continue until it automatically terminates on 31 January 2021 without the need for notice unless it is previously terminated by either party giving the other at least 12 months' prior written notice expiring before 31 January 2021. As at the date of this report, the unexpired term under Carol Gysin’s contract was 12 months. Illustration of application of remuneration policy The charts below provide estimates of the potential remuneration receivable pursuant to the remuneration policy by the managing director (being the only executive director) and the potential split of such remuneration between its different components (being the ﬁxed component, the annual variable component and the long term variable component) under three different performance scenarios: minimum, in line with expectations and maximum. The long term variable component in respect of 2017 is nil. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 65 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 66 Governance Directors’ remuneration report continued Managing director 500 400 300 200 100 0 366 406 325 12.5% 25% 100% 87.5% 75% Minimum remuneration receivable In line with expectations Maximum remuneration receivable Fixed pay Annual bonus The ﬁgures reﬂected in the chart above have been calculated against the policies that were applicable throughout 2017 and on the basis of remuneration payable in respect of 2018. Payment for loss of ofﬁce It is not company policy to include provisions in directors’ service contracts for compensation for early termination beyond providing for an entitlement to a payment in lieu of notice if due notice is not given. The company may cover the reasonable cost of repatriation of any expatriate executive director and the director’s spouse in the event of termination of appointment, other than for reasons of misconduct, and provided that the move back to the director’s home country takes place within a reasonable period of such termination. Consideration of employment conditions elsewhere in the company In setting the remuneration of executive directors, regard will be had to the levels of remuneration of expatriate employees overseas and to the increments granted to employees operating in the same location as the relevant director. Employee views are not speciﬁcally sought in determining this policy. Employee salaries will normally be subject to the same inﬂationary adjustment as the salaries of executive directors in their respective locations. Shareholder views Shareholders are not speciﬁcally consulted on the remuneration policy of the company. Shareholders who have expressed views on remuneration have supported the company’s policies and the application of those policies to date. Were a signiﬁcant shareholder to express a particular concern regarding any aspect of the policy, the views expressed would be carefully weighed. Approved by the board on 26 April 2018 and signed on behalf of the board by MICHAEL A ST. CLAIR-GEORGE Chairman of the remuneration committee 66 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p42-p67.qxp 27/04/2018 12:58 Page 67 Governance Directors’ responsibilities The directors are responsible for preparing the annual report and the ﬁnancial statements in accordance with applicable law and regulations. UK company law requires the directors to prepare ﬁnancial statements for each ﬁnancial year. The directors are required to prepare the group ﬁnancial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (the “EU”) and Article 4 of the IAS Regulation and have also elected from 2013 to prepare the parent company ﬁnancial statements in accordance with IFRSs as adopted by the EU. Under company law, the directors must not approve the accounts unless they are satisﬁed that they give a true and fair view of the state of affairs of the company and of the proﬁt or loss of the company for that period. In preparing these ﬁnancial statements, the directors are required to: • • • • properly select and apply accounting policies; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; provide additional disclosure when compliance with the speciﬁc requirements in IFRS is insufﬁcient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s ﬁnancial position and ﬁnancial performance; and make an assessment of the company’s ability to continue as a going concern. The directors are responsible for keeping adequate accounting records that are sufﬁcient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the ﬁnancial position of the company and enable them to ensure that the ﬁnancial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and ﬁnancial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. Responsibility statement To the best of the knowledge of each of the directors: • • • the ﬁnancial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, ﬁnancial position and proﬁt or loss of the company and the undertakings included in the consolidation taken as a whole; the “Strategic report” section of this annual report includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and the annual report and ﬁnancial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company’s performance, business model and strategy. By order of the board R.E.A. SERVICES LIMITED 26 April 2018 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 67 249315 REA Holdings p68-end.qxp 27/04/2018 13:02 Page 68 Governance Independent auditor’s report to the members of R.E.A. Holdings plc Report on the audit of the ﬁnancial statements Opinion In our opinion: • the ﬁnancial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2017 and of the group’s loss for the year then ended; the group ﬁnancial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and IFRSs as issued by the International Accounting Standards Board (IASB); the parent company ﬁnancial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and the ﬁnancial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group ﬁnancial statements, Article 4 of the IAS Regulation. • • • We have audited the ﬁnancial statements of R.E.A. Holdings plc (the ‘parent company’) and its subsidiaries (the ‘group’) which comprise: • • • • • • the Consolidated Income Statement; the Consolidated and Parent Company Balance Sheets; the Consolidated and Parent Company Statements of Changes in Equity; the Consolidated and Parent Company Cash Flow Statements; the Statement of Accounting Policies; and the related notes 1 to 43 to the Consolidated ﬁnancial statements and notes i to xix to the Company ﬁnancial statements. The ﬁnancial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the parent company ﬁnancial statements, as applied in accordance with the provisions of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the ﬁnancial statements section of our report. We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the ﬁnancial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulﬁlled our other ethical responsibilities in accordance with these requirements. We conﬁrm that the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the group or the parent company. We believe that the audit evidence we have obtained is sufﬁcient and appropriate to provide a basis for our opinion. Summary of our audit approach Key audit matters Materiality Scoping Plantation assets valuation Investments in stone and coal Sun 6 accounting system implementation The key audit matters that we identiﬁed in the current year were: • • • The plantation assets valuation and the investments in stone and coal key audit matters included within this report were also considered key audit matters in the prior period. Due to a number of tax matters in respect of old years being settled with Indonesian tax authorities in recent years we have decided to remove Indonesian tax liabilities as a key audit matter as we now consider the risk to be lower than previously. The materiality that we used for the group ﬁnancial statements was $7.3m which was determined on the basis of 1.75% of plantation assets. The scope of our audit of the group remains unchanged from the previous year. We continue to focus our group audit scope primarily on the audit work of the 7 largest plantation entities and the 3 UK based entities, all of which were subject to full scope audits. 68 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:02 Page 69 Signiﬁcant changes in our approach The most signiﬁcant change to our audit approach compared to the previous period is with regard to procedures on plantation assets. Procedures performed in 2016 focused on the implementation of the revised IAS 41 standard. In 2017 the focus of our procedures has changed to the assignation of PPE additions to the correct asset class. Conclusions relating to going concern, principal risks and viability statements We conﬁrm that we have nothing material to report, add or draw attention to in respect of these matters. We conﬁrm that we have nothing material to report, add or draw attention to in respect of these matters. Going concern We have reviewed the directors’ statement on page 44 to the ﬁnancial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identiﬁcation of any material uncertainties to the group’s and company’s ability to continue to do so over a period of at least twelve months from the date of approval of the ﬁnancial statements. We are required to state whether we have anything material to add or draw attention to in relation to that statement required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our knowledge obtained in the audit. Principal risks and viability statement Based solely on reading the directors’ statements and considering whether they were consistent with the knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation of the directors’ assessment of the group’s and the company’s ability to continue as a going concern, we are required to state whether we have anything material to add or draw attention to in relation to: • • • the disclosures on pages 36 to 41 that describe the principal risks and explain how they are being managed or mitigated; the directors' conﬁrmation on page 44 that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity; or the directors’ explanation on pages 43 and 44 as to how they have assessed the prospects of the group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualiﬁcations or assumptions. We are also required to report whether the directors’ statement relating to the prospects of the group required by Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 69 249315 REA Holdings p68-end.qxp 27/04/2018 13:02 Page 70 Governance Independent auditor’s report to the members of R.E.A. Holdings plc continued Key audit matters Key audit matters are those matters that, in our professional judgement, were of most signiﬁcance in our audit of the ﬁnancial statements of the current period and include the most signiﬁcant assessed risks of material misstatement (whether or not due to fraud) that we identiﬁed. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the ﬁnancial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Plantation Assets Valuation Key audit matter description Plantation assets disclosed within property plant and equipment comprise predominantly ‘plantings’ and ‘buildings and structures’. Due to the size and importance of these assets to the group, we identiﬁed a key audit matter relating to the capitalisation and classiﬁcation of costs into plantation assets. There is a risk of potential fraud in incorrectly classifying capitalised costs into classes of property, plant and equipment. The calculation of the split is complex and the methodology judgmental. Plantings are depreciated over a useful economic life of 24 years while building and structures are depreciated over a useful economic life of up to 67 years (page 83). Incorrect classiﬁcation of capitalised costs between these two asset classes could lead to a material difference to the carrying value of ﬁxed assets in future years. At 31 December 2017 the carrying value of plantings is $174.4m and the carrying value of buildings and structures is $242.3m. The value of additions in the period to plantings is $11.5m and to buildings and structures is $17.6m (note 14) How the scope of our audit responded to the key audit matter Our work on the split of deemed cost between asset classes has included: • Reviewing the nature of the costs which have been capitalised to assess whether they are appropriate; Challenging the split of costs between plantings and buildings and structures, by reference to the testing of capitalised additions to immature plantations performed by our component audit team in Indonesia, our knowledge of the business and our interpretation of the revised IAS 41 standard; Challenge if the plantings and buildings and structures are being depreciated over appropriate useful economic lives, by comparing to scientiﬁc literature, the licensing agreements and future land rights; and Assessing the carrying value of plantings and buildings and structures for impairment as required by IAS 16 on an individual plantation (CGU) basis by creating an independent estimate for the recoverable amount of each CGU and comparing to the carrying value of plantings and buildings and structures for each. • • • Key observations Based on the audit evidence obtained from the work performed above, we conclude that the valuation of growing produce and the split of cost between the plantings and buildings and structures asset classes is appropriate. 70 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:02 Page 71 Investments in stone and coal Key audit matter description The group holds loans made to stone and coal concessions in Indonesia for which control is outside of the group and which are discussed in the audit committee report on page 55. The recoverability of these loans rely on certain assumptions and estimates in relation to the likelihood of the underlying investments generating suitable future proﬁts. These have the potential to be subject to management bias and include the discount rate, the timing of commencement of future mining operations and expected commodity sale prices. At 31 December 2017 the carrying value of the loans was $37.9m, an increase from $37.2m at 31 December 2016 (note 16, and the accounting policy is disclosed in note 1). During 2014, the concessions’ management guaranteed the value of the two coal concessions using the ATP stone concession. As such even though the coal operations were suspended, and continue to be suspended in 2017, the group did not impair the loans to the coal concessions. How the scope of our audit responded to the key audit matter We have focused our procedures on the ATP Andesite stone discounted cash ﬂow forecast. The forecast calculated a value in use sufﬁcient to justify the carrying value of all of the stone and coal loans. Our procedures included: • • Agreement of total stone reserves to external third party evidence; Challenge of the discount rates used by management, terminal growth rates and the forecast ﬁgures used and the assumptions in the DCF; Checks of the numerical accuracy of the DCF; Detailed sensitivity analysis to assess the outcome of a change in variables such as price, discount rates and production volume to determine the critical variables in the model; and Challenge over the expected price of stone to be used in the valuation by comparison to recent price quotes and expected increases in demand, and expenses in the proﬁt margin per year used within the calculation. • • • Key observations We are satisﬁed the value of the stone and coal loans as per the value in use calculation performed by management is reasonable. Sun 6 accounting system implementation Key audit matter description Management implemented a new accounting ledger, SUN 6, for use by Indonesian planation companies and the group consolidation performed in the UK. As part of the planned audit approach, Deloitte IT specialists in Indonesia assessed the migration of the accounting ledger onto SUN and the effectiveness of general IT controls around the system. While the data migration was successful, we assessed the general IT controls at the infrastructure level as not being designed and implemented to the standard we would expect for a group of this scale and complexity. These weaknesses in the group’s controls and ﬁnancial reporting system increase the likelihood of error or misstatement in the ﬁnancial statements. R.E.A. Holdings plc Annual Report and Accounts 2017 71 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M 249315 REA Holdings p68-end.qxp 27/04/2018 13:02 Page 72 Governance Independent auditor’s report to the members of R.E.A. Holdings plc continued How the scope of our audit responded to the key audit matter As a result of our ﬁndings, we have increased the scope of our work. We have performed the following additional procedures: • • Reduced our performance materiality from $4.4m to $3.7m; Increased the scope of our journal entry testing, to include additional tests to identify potentially fraudulent journals; Extended the scope of our substantive procedures to test the consolidation schedule which is produced within the Sun 6 accounting system. • Key observations We completed our procedures related to the consolidation and journal entries satisfactorily. As disclosed on page 40 management are considering commissioning an independent IT specialist to review the IT controls around the Sun 6 accounting system, with a view to strengthening the control environment in 2018. Our application of materiality We deﬁne materiality as the magnitude of misstatement in the ﬁnancial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or inﬂuenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the ﬁnancial statements as a whole as follows: Group ﬁnancial statements Parent company ﬁnancial statements Materiality $7.3m (2016: $6.5m) $5.9m (2016: $5.9m) Basis for determining materiality Rationale for the benchmark applied 1.75% of plantation assets. (2016 2% of plantation assets) We have deﬁned planation assets as the sum of: • • • Plantings - $173m – note 14 Buildings & Structures - $242m – note 14 Biological Assets - $2m – note 19 We consider that the valuation of plantation assets is a key indicator for the current and future performance of the company. It is the KPI of critical interest to users of the ﬁnancial statements of R.E.A. Holdings plc as it is the key measure of the company’s success in developing its palm oil plantations. 3% of net assets (2016: 3% of net assets) The parent company is a holding company whose purpose is to consolidate the active trading entities and a number of other group companies. We consider net assets to be the most important balance to the users of the financial statements. We determine performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed materiality for the ﬁnancial statements as a whole. As discussed in the key audit matter relating to the Sun accounting system discussed above, we set Group performance materiality at $3.7m which is approximately 50% of group materiality. We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of $250k (2016: $250k) for the group and $250k (2016: $250k) for the parent company, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identiﬁed when assessing the overall presentation of the ﬁnancial statements. An overview of the scope of our audit Our group audit was scoped by obtaining an understanding of the group and its environment, including group-wide controls, and assessing the risks of material misstatement at the group level. Based on that assessment, we focused on the full scope audit work of 10 active legal entities, all of which were subject to full scope audits. The 10 active legal entities include 7 Indonesian plantation companies and 3 UK holding or services companies. 72 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:02 Page 73 The audit of the 7 plantation companies has been performed by a Deloitte Indonesia component team. The UK group team have been involved in the planning, risk assessment, performing and reviewing stages of the component audit. The group audit team continued to follow a programme of planned visits to Indonesia that has been designed so that appropriately qualiﬁed members of the group audit team visit the group’s operations and component auditors in Indonesia annually and visit the plantation estates at least once every three years, with the most recent visit to the plantations begin in April 2017. These 10 entities represent the principal business activities and account for 97% (2016: 98%) of the group’s net assets, 100% (2016: 100%) of the group’s revenue and 96% (2016: 98%) of the group’s loss before tax. They were also selected to provide an appropriate basis for undertaking audit work to address the risks of material misstatement identiﬁed above. Our audit work at the 10 active legal entities was executed at levels of materiality applicable to each individual entity which were lower than group materiality and ranged from $3.5m to $6.0m (2016: $3.2m to $4.5m). At the parent entity level we also tested the consolidation process and carried out analytical procedures to conﬁrm our conclusion that there were no signiﬁcant risks of material misstatement of the aggregated ﬁnancial information of the remaining components not subject to audit or audit of speciﬁed account balances. We have nothing to report in respect of these matters. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report and accounts other than the ﬁnancial statements and our auditor’s report thereon. Our opinion on the ﬁnancial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the ﬁnancial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the ﬁnancial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the ﬁnancial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. In this context, matters that we are speciﬁcally required to report to you as uncorrected material misstatements of the other information include where we conclude that: • Fair, balanced and understandable – the statement given by the directors that they consider the annual report and ﬁnancial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group’s position and performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 73 249315 REA Holdings p68-end.qxp 27/04/2018 13:02 Page 74 Governance Independent auditor’s report to the members of R.E.A. Holdings plc continued • • Audit committee reporting – the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the directors’ statement required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing provisions speciﬁed for review by the auditor in accordance with Listing Rule 9.8.10R (2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. Responsibilities of directors As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the ﬁnancial statements and for being satisﬁed that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of ﬁnancial statements that are free from material misstatement, whether due to fraud or error. In preparing the ﬁnancial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the ﬁnancial statements Our objectives are to obtain reasonable assurance about whether the ﬁnancial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to inﬂuence the economic decisions of users taken on the basis of these ﬁnancial statements. A further description of our responsibilities for the audit of the ﬁnancial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Use of our report This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. 74 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:02 Page 75 Report on other legal and regulatory requirements Opinion on other matters prescribed by the Companies Act 2006 In our opinion the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: • the information given in the strategic report and the directors’ report for the ﬁnancial year for which the ﬁnancial statements are prepared is consistent with the ﬁnancial statements; and the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements • In the light of the knowledge and understanding of the group and the parent company and their environment obtained in the course of the audit, we have not identiﬁed any material misstatements in the strategic report or the directors’ report. Matters on which we report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company ﬁnancial statements are not in agreement with the accounting records and returns. • • We have nothing to report in respect of these matters. Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made or the part of the directors’ remuneration report to be audited is not in agreement with the accounting records and returns. Other matters We have nothing to report in respect of these matters. Auditor tenure Following the recommendation of the audit committee, we were appointed by the board of directors in 2002 to audit the ﬁnancial statements for the year ending 31 December 2002 and subsequent ﬁnancial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the ﬁrm is 16 years, covering the years ending 31 December 2002 to 31 December 2017. Consistency of the audit report with the additional report to the audit committee Our audit opinion is consistent with the additional report to the audit committee we are required to provide in accordance with ISAs (UK). Colin Rawlings, FCA (Senior statutory auditor) for and on behalf of Deloitte LLP Statutory Auditor London 26 April 2018 R.E.A. Holdings plc Annual Report and Accounts 2017 75 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M 249315 REA Holdings p68-end.qxp 27/04/2018 13:02 Page 76 Group ﬁnancial statements Consolidated income statement for the year ended 31 December 2017 2017 2016 Note $’000 $’000 Revenue 2 100,241 79,265 Net (loss) / gain arising from changes in fair value of agricultural produce inventory 4 (1,069) 632 Cost of sales: Depreciation and amortisation (22,215) (20,959) Other costs (64,062) (50,868) Gross profit 12,895 8,070 Other operating income 2 – 1 Distribution costs (1,378) (1,110) Administrative expenses 5 (13,681) (11,987) Operating loss (2,164) (5,026) Investment revenues 2, 7 1,072 1,742 Finance costs 8 (20,770) (6,005) Loss before tax 5 (21,862) (9,289) Tax 9 (3,039) (2,019) Loss for the year (24,901) (11,308) Attributable to: Ordinary shareholders (27,408) (17,800) Preference shareholders 10 7,777 7,402 Non-controlling interests 34 (5,270) (910) (24,901) (11,308) Basic and diluted loss per 25p ordinary share (US cents) 11 (67.0) (48.2) The company is exempt from preparing and disclosing its proﬁt and loss account All operations for both years are continuing 76 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:02 Page 77 Group ﬁnancial statements Consolidated balance sheet as at 31 December 2017 2017 2016 Note $’000 $’000 Non-current assets Goodwill 12 12,578 12,578 Intangible assets 13 3,477 4,176 Property, plant and equipment 14 482,341 471,922 Land titles 15 35,178 34,230 Stone and coal interests 16 37,877 37,208 Deferred tax assets 27 9,867 12,781 Non-current receivables 4,996 3,136 Total non-current assets 586,314 576,031 Current assets Inventories 18 11,497 15,767 Biological assets 19 1,927 2,037 Investments 20 2,730 9,880 Trade and other receivables 21 39,280 42,554 Cash and cash equivalents 22 5,543 24,593 Total current assets 60,977 94,831 Total assets 647,291 670,862 Current liabilities Trade and other payables 29 (62,212) (43,426) Current tax liabilities (11) (317) Bank loans 24 (28,140) (28,628) Sterling notes 25 – (10,103) US dollar notes 26 – (20,048) Other loans and payables 28 (10,469) (519) Total current liabilities (100,832) (103,041) Non-current liabilities Bank loans 24 (96,991) (97,771) Sterling notes 25 (41,364) (37,037) US dollar notes 26 (23,649) (23,646) Deferred tax liabilities 27 (79,600) (80,830) Other loans and payables 28 (28,120) (18,987) Total non-current liabilities (269,724) (258,271) Total liabilities (370,556) (361,312) Net assets 276,735 309,550 Equity Share capital 30 132,528 121,426 Share premium account 31 42,401 42,585 Translation reserve 32 (50,897) (39,127) Retained earnings 33 135,074 161,839 259,106 286,723 Non-controlling interests 34 17,629 22,827 Total equity 276,735 309,550 Approved by the board on 26 April 2018 and signed on behalf of the board. DAVID J BLACKETT Chairman O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 77 249315 REA Holdings p68-end.qxp 27/04/2018 13:02 Page 78 Group ﬁnancial statements Consolidated statement of comprehensive income for the year ended 31 December 2017 2017 2016 Note $’000 $’000 Loss for the year (24,901) (11,308) Other comprehensive income Items that may be reclassified to profit or loss: Actuarial losses (205) (569) Deferred tax on actuarial losses 27 41 143 (164) (426) Items that will not be reclassified to profit and loss: Exchange differences on translation of foreign operations 32 (11,419) 5,222 Exchange differences on deferred tax 27 (279) 2,617 (11,862) 7,413 Total comprehensive income for the year (36,763) (3,895) Attributable to: Ordinary shareholders (39,270) (10,387) Preference shareholders 7,777 7,402 Non-controlling interests (5,270) (910) (36,763) (3,895) Consolidated statement of changes in equity for the year ended 31 December 2017 Share Share Translation Retained Subtotal Non- Total capital premium reserve earnings controlling equity interests (note 30) (note 31) (note 32) (note 33) (note 34) $’000 $’000 $’000 $’000 $’000 $’000 $’000 At 1 January 2016 120,288 30,683 (46,282) 187,481 292,170 1,652 293,822 Total comprehensive income – – 7,155 (10,824) (3,669) (226) (3,895) Sale of shareholding in sub-group – – – (7,416) (7,416) 21,401 13,985 Issue of new ordinary shares (cash) 1,138 11,902 – – 13,040 – 13,040 Dividends to preference shareholders – – – (7,402) (7,402) – (7,402) At 31 December 2016 121,426 42,585 (39,127) 161,839 286,723 22,827 309,550 Total comprehensive income – – (11,770) (19,795) (31,565) (5,198) (36,763) Sale of shareholding in sub-group – – – 807 807 – 807 Issue of new preference shares (cash) 11,102 (184) – – 10,918 – 10,918 Dividends to preference shareholders – – – (7,777) (7,777) – (7,777) At 31 December 2017 132,528 42,401 (50,897) 135,074 259,106 17,629 276,735 78 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 79 Group ﬁnancial statements Consolidated cash ﬂow statement for the year ended 31 December 2017 2017 2016 Note $’000 $’000 Net cash from operating activities 35 19,670 2,598 Investing activities Interest received 29 1,742 Proceeds from disposal of property, plant and equipment – 61 Purchases of property, plant and equipment (31,960) (31,137) Purchases of intangible assets (112) – Expenditure on land titles (949) (367) Investment in stone and coal interests (669) (1,860) Net cash used in investing activities (33,661) (31,561) Financing activities Preference dividends paid (7,777) (7,402) Repayment of borrowings (6,754) (11,004) Repayment of borrowings from related party (7,400) – Proceeds of issue of ordinary shares, less costs of issue – 13,040 Proceeds of issue of preference shares, less costs of issue 10,918 – Proceeds of issue of 2022 dollar notes, less costs of issue – (44) Redemption of 2017 dollar notes (20,156) (45) Redemption of 2017 sterling notes (11,154) – Proceeds of issue / sale of sterling notes, less costs of issue – 1,922 Proceeds of sale of investments 7,078 – Proceeds of sale of shareholding in subsidiary – 13,985 New borrowings from non-controlling shareholder and related party 23,986 12,446 New bank borrowings drawn 6,356 14,939 Net cash from financing activities (4,903) 37,837 Cash and cash equivalents Net (decrease)/increase in cash and cash equivalents 36 (18,894) 8,874 Cash and cash equivalents at beginning of year 24,593 15,758 Effect of exchange rate changes (156) (39) Cash and cash equivalents at end of year 22 5,543 24,593 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 79 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 80 Group ﬁnancial statements Accounting policies (group) General information R.E.A. Holdings plc is a company incorporated and domiciled in the United Kingdom under the Companies Act 2006 with registration number 00671099. The company’s registered ofﬁce is at First Floor, 32-36 Great Portland Street, London W1X 8QX. Details of the group’s principal activities are provided in the Strategic report. Basis of accounting The consolidated ﬁnancial statements set out on pages 76 to 109 are prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the EU as at the date of approval of the ﬁnancial statements and therefore comply with Article 4 of the EU IAS Regulation. The statements are prepared under the historical cost convention except where otherwise stated in the accounting policies. The directors have conducted a review of the projected cash ﬂows from operations, investing and ﬁnancing and have set out their assessment of liquidity and ﬁnancing adequacy on pages 32 and 33 of the strategic report, including the actions either in progress or contemplated in order to ensure adequate liquidity for the next twelve months. Accordingly, having made due enquiries, the directors reasonably expect that the company and the group have adequate resources to continue in operational existence for at least twelve months from the date of approval of the ﬁnancial statements and, therefore, they continue to adopt the going concern basis of accounting in preparing the ﬁnancial statements. Presentational currency The consolidated ﬁnancial statements of the group are presented in US dollars, which is also considered to be the currency of the primary economic environment in which the group operates. References to “$” or “dollar” in these ﬁnancial statements are to the lawful currency of the United States of America. Adoption of new and revised standards In the current year the group has applied a number of amendments to IFRSs issued by the International Accounting Standards Board (“IASB”) that are mandatorily effective for an accounting period beginning on 1 January 2017. There have been no changes to the group’s accounting policies resulting from the adoption of these amendments to IFRSs, although certain disclosures have been amended to reﬂect the new requirements. In particular the Amendments to IAS 7 – Disclosure Initiative – require an entity to provide disclosures that enable users of ﬁnancial statements to evaluate changes in liabilities from 80 R.E.A. Holdings plc Annual Report and Accounts 2017 ﬁnancing activities, including both cash and non-cash changes. The group’s liabilities arising from ﬁnancing activities consist of bank loans (note 24), sterling notes (note 25), dollar notes (note 26) and loans from non- controlling shareholders (note 28). A reconciliation between the opening and closing balances of these items is provided (note 23). Consistent with the transition provisions of the amendments, the group has not disclosed comparative information for the prior year. At the date of authorisation of these ﬁnancial statements, the standards and interpretations which were in issue but not yet effective (and in certain cases had not yet been adopted by the EU) have not been applied in these ﬁnancial statements) are set out below together with their effective dates of implementation: IFRS 9: Financial instruments 1 January 2018 IFRS 15: Revenue from contracts with customers 1 January 2018 IFRS 16: Leases 1 January 2019 IFRS 2: Classiﬁcation and measurement of share-based payment transactions (amendments) 1 January 2018 IFRS 4: Applying IFRS 9 Financial instruments with IFRS 4 Insurance contracts (amendments) 1 January 2018 IFRIC interpretation 22: Foreign currency transactions and advance consideration 1 January 2018 IAS 40: Transfers of investment property (amendments) 1 January 2018 IFRS 9 implements the IASB’s project to replace IAS 39: Financial instruments: recognition and measurement. It sets out the classiﬁcation and measurement criteria for ﬁnancial assets and ﬁnancial liabilities and the requirements relating to hedge accounting. It is not considered that the effect of applying the standard will have a material impact on the group’s reported proﬁt or equity. The directors have also considered the impact of IFRS 15: Revenue from contracts with customers. The new standard requires entities to recognise revenue on the transfer of goods or services to customers in amounts that reﬂect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modiﬁcations) and improve guidance for multiple-element arrangements. The directors do not consider that the adoption of IFRS 15 will result in any change to the amount and timing of the group’s revenue but will require some additional disclosures. 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 81 The directors do not expect that the adoption of the other standards, amendments and interpretations listed above will have a material impact on the ﬁnancial statements of the group in future periods. Basis of consolidation The consolidated ﬁnancial statements consolidate the ﬁnancial statements of the company and its subsidiary companies (as listed in note (iv) to the company’s individual ﬁnancial statements) made up to 31 December of each year. The acquisition method of accounting is adopted with assets and liabilities valued at fair values at the date of acquisition. The interest of non-controlling shareholders is stated at the non-controlling shareholders’ proportion of the fair values of the assets and liabilities recognised. The share of total comprehensive income is attributed to the owners of the parent and to non-controlling interests even if this results in the non-controlling interests having a deﬁcit balance. Results of subsidiaries acquired or disposed of are included in the consolidated income statement from the effective date of acquisition or to the effective date of disposal. Where necessary, adjustments are made to the ﬁnancial statements of subsidiaries to bring the accounting policies into line with those used by the group. On acquisition, any excess of the fair value of the consideration given over the fair value of identiﬁable net assets acquired is recognised as goodwill. Any deﬁciency in consideration given against the fair value of the identiﬁable net assets acquired is credited to proﬁt or loss in the consolidated income statement in the period of acquisition. transition to IFRS is retained at the previous UK Generally Accepted Accounting Practice amount subject to testing for impairment at that date. Goodwill written off to reserves prior to 1 January 1998, in accordance with the accounting standards then in force, has not been reinstated and is not included in determining any subsequent proﬁt or loss on disposal. Other intangible assets Other intangible assets are stated at cost less accumulated amortisation and any recognised impairment losses. Intangible assets acquired separately are measured at cost on initial recognition. An intangible asset with a ﬁnite life is amortised on a straight-line basis so as to charge its cost to the income statement over its expected useful life. An intangible asset with an indeﬁnite life is not amortised but is tested at least annually for impairment and carried at cost less any recognised impairment losses. Computer software that is not integral to an item of property, plant and equipment is recognised separately as an intangible asset. Amortisation is provided on a straight-line basis so as to charge the cost of the software to the income statement over its expected useful life, not exceeding eight years. The expected useful lives of acquired intangible assets are as follows: Purchased software Licences (other than land titles) Other 4-8 years duration of the licence up to 6 years All intra-group transactions, balances, income and expenses are eliminated on consolidation. Revenue recognition Goodwill Goodwill is recognised as an asset on the basis described under “Basis of consolidation” above and once recognised is not depreciated although it is tested for impairment at least annually. Any impairment is debited immediately as a loss in the consolidated income statement and is not subsequently reversed. On disposal of a subsidiary, the attributable amount of any goodwill is included in the determination of the proﬁt or loss on disposal. For the purpose of impairment testing, goodwill is allocated to each of the group's cash generating units expected to beneﬁt from the synergies of the combination. Cash generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. Goodwill arising between 1 January 1998 and the date of Revenue is measured at the fair value of the consideration received or receivable in respect of goods and services provided in the normal course of business, net of VAT and other sales related taxes. Sales of goods are recognised when the signiﬁcant risks and rewards of ownership of the goods are transferred to the buyer and include contracted sales in respect of which the contracted goods are available for collection by the buyer in the accounting period. Income from services is accrued on a time basis by reference to the rate of fee agreed for the provision of services. Interest income is accrued on a time basis by reference to the principal outstanding and at the effective interest rate applicable (which is the rate that exactly discounts estimated future cash receipts, through the expected life of the ﬁnancial asset, to that asset’s net carrying amount). Dividend income is recognised when the shareholders’ rights to receive payment have been established. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 81 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 82 Group ﬁnancial statements Accounting policies (group) continued Leasing Borrowing costs Assets held under ﬁnance leases and other similar contracts are recognised as assets of the group at their fair values or, if lower, at the present values of minimum lease payments (for each asset, determined at the inception of the lease) and are depreciated over the shorter of the lease terms and their useful lives. The corresponding liabilities are included in the balance sheet as ﬁnance lease obligations. Lease payments are apportioned between ﬁnance charges and a reduction in the lease obligation to produce a constant rate of interest on the balance of the capital repayments outstanding. Hire purchase transactions are dealt with similarly, except that assets are depreciated over their useful lives. Finance and hire purchase charges are charged directly against income. Rental payments under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Borrowing costs incurred in ﬁnancing construction or installation of qualifying property, plant or equipment are added to the cost of the qualifying asset, until such time as the construction or installation is substantially complete and the asset is ready for its intended use. Borrowing costs incurred in ﬁnancing the planting of extensions to the developed agricultural area are treated as expenditure relating to plantings until such extensions reach maturity. All other borrowing costs are recognised in the consolidated income statement of the period in which they are incurred. Operating proﬁt Operating proﬁt is stated after any gain or loss arising from changes in the fair value of agricultural produce inventory but before investment income and ﬁnance costs. Pensions and other post-employment beneﬁts Foreign currencies United Kingdom Transactions in foreign currencies are recorded at the rates of exchange ruling at the dates of the transactions. At each balance sheet date, assets and liabilities denominated in foreign currencies are retranslated at the rates of exchange prevailing at that date except that non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the retranslation of other items that are subject to retranslation, are included in the net proﬁt or loss for the period, except for exchange differences arising on non-monetary assets and liabilities, including foreign currency loans, which, to the extent that such loans relate to investment in overseas operations or hedge the group’s investment in such operations, are recognised directly in equity. For consolidation purposes, the assets and liabilities of any group entity with a functional currency other than the US dollar are translated at the exchange rate at the balance sheet date. Income and expenses are translated at the average rate for the period unless exchange rates ﬂuctuate signiﬁcantly. Exchange differences arising are classiﬁed as equity and transferred to the group’s translation reserve. Such exchange differences are recognised as income or expenses in the period in which the entity is sold. Goodwill and fair value adjustments arising on the acquisition of an entity with a functional currency other than the US dollar are treated as assets and liabilities of that entity and are translated at the closing rate of exchange. Certain existing and former UK employees of the group are members of a multi-employer contributory deﬁned beneﬁt scheme. The estimated regular cost of providing for beneﬁts under this scheme is calculated so that it represents a substantially level percentage of current and future pensionable payroll and is charged as an expense as it is incurred. Amounts payable to recover actuarial losses, which are assessed at each actuarial valuation, are payable over a recovery period agreed with the scheme trustees. Provision is made for the present value of future amounts payable by the group to cover its share of such losses. The provision is reassessed at each accounting date, with the difference on reassessment being charged or credited to the consolidated income statement in addition to the adjusted regular cost for the period. Indonesia In accordance with local labour law, the group’s employees in Indonesia are entitled to lump sum payments on retirement. These obligations are unfunded and provision is made annually on the basis of a periodic assessment by independent actuaries. Actuarial gains and losses are recognised in the statement of comprehensive income; any other increase or decrease in the provision is recognised in the consolidated statement of income, net of amounts added to plantings within property, plant and equipment. Taxation The tax expense represents the sum of tax currently payable and deferred tax. Tax currently payable represents amounts 82 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 83 expected to be paid (or recovered) based on the taxable proﬁt for the period using the tax rates and laws that have been enacted or substantively enacted at the balance sheet date. Deferred tax is calculated on the balance sheet liability method on a non-discounted basis on differences between the carrying amounts of assets and liabilities in the ﬁnancial statements and the corresponding ﬁscal balances used in the computation of taxable proﬁts (temporary differences). Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable proﬁts will be available against which deductible temporary differences can be utilised. A deferred tax asset or liability is not recognised in respect of a temporary difference that arises from goodwill or from the initial recognition of other assets or liabilities in a transaction which affects neither the proﬁt for tax purposes nor the accounting proﬁt. Deferred tax is calculated at the tax rates that are expected to apply in the periods when deferred tax liabilities are settled or deferred tax assets are realised. Deferred tax is charged or credited in the consolidated income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Property, plant and equipment - plantings On application of the amendments to IAS41: Agriculture and IAS 19: Property, plant and equipment, the directors elected to state the group’s plantings at deemed cost being the fair value recognised as at 1 January 2015 less the fair value at that date of the growing produce which is disclosed in current assets under “Biological assets”. Additions after that date (which include interest incurred during the period of immaturity) are recognised at historical cost. Depreciation is not provided on immature plants. Once plants reach maturity, depreciation is provided on a straight line basis at a rate that will write off the costs of the plants by the date on which they are scheduled to be replanted, with a maximum of 24 years. Property, plant and equipment - other All property, plant and equipment other than plantings is carried at original cost less any accumulated depreciation and any accumulated impairment losses. Depreciation is computed using the straight line method so as to write off the cost of assets, other than property and plant under construction, over the estimated useful lives of the assets as follows: buildings and structures – 20 to 67 years; plant, equipment and vehicles - 5 to 16 years. Construction in progress is not depreciated. Where the directors consider that the residual value of an asset exceeds its carrying value, no depreciation will be provided. Assets held under ﬁnance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the terms of the relevant leases. The gain or loss on the disposal or retirement of an asset is determined as the difference between the sales proceeds, less costs of disposal, and the carrying amount of the asset and is recognised in the consolidated income statement. Land Land comprises payments to acquire Indonesian licences over land for plantation purposes, together with related costs including surveys and villager compensation. In view of the indeﬁnite economic life associated with such licences, they are not depreciated. Impairment of tangible and intangible assets excluding goodwill At each balance sheet date, the group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that any asset has suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash ﬂows that are independent from other assets, the group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indeﬁnite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. The recoverable amount of an asset (or cash-generating unit) is the higher of fair value less costs to sell and value in use. In assessing value in use, estimated future cash ﬂows are discounted to their present value using a pre-tax discount rate that reﬂects current market assessments of the time value of money and those risks speciﬁc to the asset (or cash-generating unit) for which the estimates of future cash ﬂows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where, with respect to assets other than goodwill, an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash- generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the R.E.A. Holdings plc Annual Report and Accounts 2017 83 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 84 Group ﬁnancial statements Accounting policies (group) continued relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Inventories Inventories of agricultural produce harvested from the group’s oil palms are stated at fair value at the point of harvest of the fresh fruit bunches (“FFB”) from which the produce derives plus costs incurred in the processing of such FFB (including direct labour costs and overheads that have been incurred in bringing such inventories to their present location and condition) or at net realisable value if lower. Inventories of engineering and other items are valued at the lower of cost, on the weighted average method, or net realisable value. For these purposes, net realisable value represents the estimated selling price (having regard to any outstanding contracts for forward sales of produce) less all estimated costs of processing and costs incurred in marketing, selling and distribution. Biological assets Biological assets comprise the growing produce (fresh fruit bunches – “FFB”) on oil palm trees and are carried at fair value using a formulaic methodology to determine the estimated value of the oil content of FFB which develops in the fruitlets in the ﬁve to six weeks immediately prior to harvest. The oil content so derived, both CPO and CPKO, is valued at market value, after deducting harvesting, processing and transport costs. Periodic movements in the fair value of growing produce are reﬂected in the consolidated income statement Recognition and de-recognition of ﬁnancial instruments Financial assets and liabilities are recognised in the group’s ﬁnancial statements when the group becomes a party to the contractual provisions of the relative constituent instruments. Financial assets are derecognised only when the contractual rights to the cash ﬂows from the assets expire or if the group transfers substantially all the risks and rewards of ownership to another party. Financial liabilities are derecognised when the group’s obligations are discharged, cancelled or have expired. Non-derivative ﬁnancial assets The group’s non-derivative ﬁnancial assets comprise loans and receivables (including stone and coal interests), and cash and cash equivalents. The group does not hold any ﬁnancial assets designated as held at “fair value through proﬁt and loss” or “available-for-sale” ﬁnancial assets. 84 R.E.A. Holdings plc Annual Report and Accounts 2017 Loans and receivables Trade receivables, loans and other receivables in respect of which payments are ﬁxed or determinable and which are not quoted in an active market are classiﬁed as loans and receivables. Stone and coal interests are also classiﬁed as loans and receivables. Stone and coal interests are measured at amortised cost using the effective interest rate method. All other loans and receivables held by the group are non-interest bearing and are stated at their nominal amount. All loans and receivables are reduced by appropriate allowances for potentially irrecoverable amounts. Cash and cash equivalents Cash and cash equivalents comprise cash in hand, demand deposits and other short-term highly liquid investments that have a maturity of not more than three months from the date of acquisition and are readily convertible to a known amount of cash and, being subject to an insigniﬁcant risk of changes in value, are stated at their nominal amounts. Held-to-maturity investments Debentures and shares with ﬁxed and determinable payments and ﬁxed maturity dates that are intended to be held to maturity are classiﬁed as held-to-maturity investments, and are measured at amortised cost using the effective interest method, less any impairment, with revenue recognised on an effective yield basis. Non-derivative ﬁnancial liabilities The group’s non-derivative ﬁnancial liabilities comprise redeemable instruments, bank borrowings, loans from non- controlling shareholders, ﬁnance leases and trade payables, which are held at amortised cost. Note issues, bank borrowings and ﬁnance leases Redeemable instruments being US dollar and sterling note issues, bank borrowings and ﬁnance leases are classiﬁed in accordance with the substance of the relative contractual arrangements. Finance costs are charged to income on an accruals basis, using the effective interest method, and comprise, with respect to redeemable instruments, the coupon payable together with the amortisation of issuance costs (which include any premiums payable or expected by the directors to be payable on settlement or redemption) and, with respect to bank borrowings and ﬁnance leases, the contractual rate of interest together with the amortisation of costs associated with the negotiation of, and compliance with, the contractual terms and conditions. Redeemable instruments are recorded in the accounts at their expected redemption value net of the relative 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 85 unamortised balances of issuance costs. Bank borrowings and ﬁnance leases are recorded at the amounts of the proceeds received less subsequent repayments with the relative unamortised balance of costs treated as non-current receivables. Trade payables All trade payables owed by the group are non-interest bearing and are stated at their nominal value. Equity instruments Instruments are classiﬁed as equity instruments if the substance of the relative contractual arrangements evidences a residual interest in the assets of the group after deducting all of its liabilities. Equity instruments issued by the company are recorded at the proceeds received, net of direct issue costs not charged to income. The preference shares of the company are regarded as equity instruments. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 85 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 86 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements 1. Critical accounting judgements and key sources of estimation uncertainty In the application of the group’s accounting policies, which are set out in “Accounting policies (group)” above, the directors are required to make judgements, estimates and assumptions. Such judgements, estimates and assumptions are based on historical experience and other factors that are considered to be relevant. Actual values of assets and amounts of liabilities may differ from estimates. The judgements, estimates and assumptions are reviewed on a regular basis. Revisions to estimates are recognised in the period in which the estimates are revised. Critical judgements in applying the group’s accounting policies The following are critical judgements not being judgements involving estimations (which are dealt with below) that the directors have made in the process of applying the group’s accounting policies. Assets held for sale When directors have decided to seek purchasers for any non-current asset or disposal group, they are required by IFRS 5 Non-current assets held for sale and discontinued operations to determine whether such asset or disposal group should be classiﬁed as held for sale and disclosed as a current asset at the lower of its carrying value or fair value less costs to sell. For such asset to be so classiﬁed, it must be available for immediate sale and its sale must, in the opinion of the directors, be highly probable. The directors have reviewed the chronology of the events leading to the execution of the conditional sale contract for the group’s investment in PT Putra Bongan Jaya (“PBJ”), as disclosed in note 40, and have concluded that as at 31 December 2017, the sale of PBJ was not highly probable. Biological assets IAS 41 “Agriculture” requires the determination of the fair value of biological assets (the growing crop of FFB). No market exists for unripe FFB, so management must select an appropriate methodology to be used, together with suitable metrics, for determining fair value. The quantity of trees and the absence of accepted valuation bases for measuring the value of the ripening FFB between ﬂowering and harvest have led management to value the growing crop of FFB by reference to the formation of the oil content in the fruitlets on the FFB in the period immediately before harvest. Capitalisation of interest and other costs As described under “Property plant and equipment - plantings” in “Accounting policies (group)”, all expenditure on plantings up to maturity, including interest, is treated as an addition to such assets. The directors have determined that normally such capitalisation will cease at the end of the third ﬁnancial year following the year in which land clearing commenced. At this point, plantings should produce a commercial harvest and accordingly be treated as having been brought into use for the purposes of IAS16 “Property plant and equipment” and of IAS 23 “Borrowing costs”. However, crop yields at this point may vary depending on the time of year that land clearing commenced and on climatic conditions thereafter. In speciﬁc cases, the directors may elect to extend the period of capitalisation by a further year. Land The Indonesian system of land tenure for agricultural purposes (“hak guna usaha” or “HGU”) gives the licensee rights to occupy for periods of up to 35 years, followed by an extension and then further renewals of between 25 and 35 years. Local law and regulation is silent on the extent of renewals after the ﬁrst extension. However, it has always been the working assumption of those in the industry in Indonesia that such renewals will be permitted, at negligible cost as is currently the case, and accordingly replanting programmes are reliant on such judgement. Based on these and other considerations, no depreciation is applied to the costs associated with the obtaining of the initial HGUs. Taxation of retained earnings of overseas subsidiaries No liability is recognised for the taxation that would arise on the distributions to the UK in the future of the retained earnings of oversea subsidiaries on the grounds that the directors are in a position to control the timing of such distribution. Key sources of estimation uncertainty The key sources of estimation uncertainty at the balance sheet date, which have a signiﬁcant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁnancial year, are described below. Biological assets Because of the inherent uncertainty associated with the valuation methodology used in determination of the fair value of the group’s biological assets, and the fact that choice of a different methodology could give a different result, the actual value of ripening FFB may differ from that estimated (see note 19). Taxes The group is subject to taxes in various jurisdictions. Uncertainties relating to certain Indonesian legislative provisions, the availability of tax losses, the future periods in which timing differences are likely to reverse and the ﬁnal determination of liabilities in respect of disputed tax items in Indonesia (see note 9) mean that tax outcomes may differ from estimates. Stone and coal interests In view of the ﬂuctuations in the market prices for stone and coal to be extracted from the group’s concessions, the carrying value of the stone and coal interests may differ from their realisable value (see note 16). 86 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 87 2. Revenue 2017 2016 $’000 $’000 Sales of goods 99,956 77,642 Revenue from services 285 1,623 100,241 79,265 Other operating income – 1 Investment revenue 1,072 1,742 Total revenue 101,313 81,008 In 2017, two customers accounted for respectively 60 per cent and 24 per cent of the group’s sales of agricultural goods (2016: two customers, 72 per cent and 16 per cent). As stated in note 23 “Credit risk”, substantially all sales of goods are made on the basis of cash against documents or letters of credit and accordingly the directors do not consider that these sales result in a concentration of credit risk to the group. The crop of oil palm fresh fruit bunches for 2017 amounted to 530,565 tonnes (2016: 468,371 tonnes). The fair value of the crop of fresh fruit bunches was $61.6 million (2016: $49.7 million), based on the price formulae determined by the Indonesian government for purchases of fresh fruit bunches from smallholders. 3. Segment information In the table below, the group’s sales of goods are analysed by geographical destination and the carrying amount of net assets is analysed by geographical area of asset location. The group operates in two segments: the cultivation of oil palms and stone and coal operations. In 2017 and 2016, the latter did not meet the quantitative thresholds set out in IFRS 8 “Operating segments” and, accordingly, no analyses are provided by business segment. 2017 2016 $’m $’m Sales by geographical destination: Indonesia 100.2 79.3 Rest of World – – 100.2 79.3 Carrying amount of net assets by geographical area of asset location: UK, Continental Europe and Singapore 58.0 56.0 Indonesia 218.7 253.6 276.7 309.6 4. Agricultural produce inventory movement The net (loss) / gain arising from changes in fair value of agricultural produce inventory represents the movement in the fair value of that inventory less the amount of the movement in such inventory at historic cost (which is included in cost of sales). O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 87 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 88 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 5. Loss before tax 2017 2016 $’000 $’000 Salient items charged / (credited) in arriving at loss before tax Administrative expenses (see below) 13,681 11,987 Movement in inventories (at historic cost) (883) (313) Amounts provided against inventories – 73 Movement in fair value of growing produce (110) 68 Operating lease rentals 284 373 Amortisation of intangible assets 812 74 Depreciation of property, plant and equipment 21,419 20,453 Amortisation of land titles – 432 Administrative expenses Net foreign exchange losses – 1,290 Loss on disposal of property, plant and equipment – 12 Indonesian operations 14,685 12,756 Head office 5,665 5,377 20,350 19,435 Amount included as additions to property, plant and equipment (6,669) (7,448) 13,681 11,987 Amounts payable to the company’s auditor The amount payable to Deloitte LLP for the audit of the company’s ﬁnancial statements was $162,000 (2016: $149,000). Amounts payable to Deloitte LLP for the audit of accounts of subsidiaries of the company pursuant to legislation were $19,000 (2016: $17,000). Amounts payable to Deloitte LLP for other services were $9,000 (2016: $8,000) for the provision of certiﬁcates of group compliance with covenants under certain debt instruments (being certiﬁcates that those instruments require to be provided by the company’s auditor) and for tax compliance services. Amounts payable to afﬁliates of Deloitte LLP for the audit of subsidiaries’ ﬁnancial statements were $214,000 (2016: $174,000) and for other services to subsidiaries were $nil (2016: $nil). 2017 2016 $’000 $’000 Earnings before interest, tax, depreciation and amortisation Operating loss (2,164) (5,026) Depreciation and amortisation 22,215 20,959 20,051 15,933 88 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 89 6. Staff costs, including directors 2017 2016 Number Number Average number of employees (including executive directors): Agricultural – permanent 5,928 5,501 Agricultural – temporary 4,086 2,868 Head office 12 11 10,026 8,380 $’000 $’000 Their aggregate remuneration comprised: Wages and salaries 40,173 31,825 Social security costs 969 700 Pension costs 2,925 1,493 44,067 34,018 Details of the remuneration of directors are shown in the “Directors’ remuneration report”. 7. Investment revenues 2017 2016 $’000 $’000 Interest on bank deposits 32 44 Other interest income 1,040 1,698 1,072 1,742 8. Finance costs 2017 2016 $’000 $’000 Interest on bank loans and overdrafts 15,665 12,617 Interest on dollar notes 2,669 2,899 Interest on sterling notes 5,184 5,184 Interest on other loans 1,896 273 Change in value of sterling notes arising from exchange fluctuations 4,800 (10,470) Change in value of loans arising from exchange fluctuations (1,190) 1,378 Other finance charges 817 251 29,841 12,132 Amount included as additions to property, plant and equipment (9,071) (6,127) 20,770 6,005 Amounts included as additions to property, plant and equipment and construction in progress arose on borrowings applicable to the Indonesian operations and reﬂected a capitalisation rate of 23.5 per cent (2016: 22.0 per cent); there is no directly related tax relief. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 89 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 90 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 9. Tax 2017 2016 $’000 $’000 Current tax: UK corporation tax 28 1 Overseas withholding tax 1,538 1,604 Foreign tax 27 38 Foreign tax - prior year – 3 Total current tax 1,593 1,646 Deferred tax: Current year (794) 373 Prior year 2,240 – Total deferred tax 1,446 373 Total tax 3,039 2,019 Taxation is provided at the rates prevailing for the relevant jurisdiction. For Indonesia, the current and deferred taxation provision is based on a tax rate of 25 per cent (2016: 25 per cent) and for the United Kingdom, the taxation provision reﬂects a corporation tax rate of 19.25 per cent (2016: 20 per cent) and a deferred tax rate of 19 per cent (2016: 19 per cent). The rate of corporation tax reduced from 20 per cent to 19 per cent from 1 April 2017 and will reduce from 19 per cent to 17 per cent from 1 April 2020. The tax charge for the year can be reconciled to the loss per the consolidated income statement as follows: 2017 2016 $’000 $’000 Loss before tax (21,862) (9,289) Notional tax at the UK standard rate of 19.25 per cent (2016: 20 per cent) (4,208) (1,858) Tax effect of the following items: Interest not deductible 4,724 2,475 Other expenses not deductible 629 702 Non taxable income (49) (29) Overseas tax rates above UK standard rate 189 (24) Overseas withholding taxes, net of relief 6 310 Tax credit on loss in overseas subsidiary not recognised (548) 381 Tax losses in overseas subsidiaries time expired 2,240 21 Prior year adjustments – 3 Change in rate of tax applicable to UK tax losses 49 49 Additional tax provisions/(credits) 7 (11) Tax expense at effective tax rate for the year 3,039 2,019 A regulation issued in 2015 by the Indonesian Ministry of Finance restricts the amount of ﬁnance charges that may be deducted from company proﬁts for taxation purposes by reference to the debt equity ratio of the entity concerned. Where equity is negative, no deduction of ﬁnance charges is permitted. The prior year deferred tax charge of $2,240,000 relates to a portion of the tax losses of the Indonesian plantation subsidiaries as at 31 December 2016 which may not be recoverable against future taxable proﬁts within the statutory ﬁve year limit. The company’s principal subsidiary in Indonesia has been involved for several years in two tax disputes with the tax authorities. The principal case relates to a disputed assessment with respect to mark-to-market losses recorded in 2008 by a subsidiary on its cross-currency interest rate swaps. In May 2014 the Jakarta Tax Court found in favour of the subsidiary, following which the disputed tax was refunded in full. The second tax dispute relates to a disputed 2006 assessment and this was decided by the Jakarta Tax Court in 2012, in part in favour of the subsidiary, following which the related disputed tax was refunded. 90 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 91 9. Tax - continued The tax authorities have the right to apply to the Supreme Court of Indonesia for a judicial review of the Tax Court decision. This comprises an examination of the reasoning of the lower court judges, consideration of the consistency of the judgement with the evidence presented and with the relevant law, and consideration of any new evidence submitted by either party which could have a bearing on the matter. It is the normal practice of the tax authorities to ﬁle such an appeal in cases which have been decided by the lower court in favour of the taxpayer. In February 2015, the subsidiary was notiﬁed that, in regard to the ﬁrst disputed case, the tax authorities ﬁled an appeal for judicial review with the Supreme Court of Indonesia and the subsidiary ﬁled its counter submission in February 2015 within the prescribed time limit. Those elements of the judgement in favour of the subsidiary in the second dispute have also been appealed by the tax authorities to the Supreme Court for judicial review. There is no further progress to report on either appeal cases. It had been the practice of the tax authorities to withhold interest on refunds of disputed tax until the outcome of judicial review by the Supreme Court has been handed down. However, a regulation issued in late 2015 now permits tax payers to apply for such interest following receipt of the disputed tax refunds. Following the Tax Court decisions, the subsidiary applied to the tax ofﬁce for the payment to it of interest of up to 48 per cent of the disputed tax that had been refunded. This amounted to some IDR 52 billion (some $4 million) in aggregate which was received by the subsidiary in 2016. During later discussions with the local tax ofﬁce, the tax ofﬁcials rejected the subsidiary’s claim for interest on that part of the repayment which represented a refund to the subsidiary of the tax which had been voluntarily paid at the time of the disputed assessment. The subsidiary disagreed with this interpretation and in 2017 lodged an appeal with the Supreme Court. Meanwhile it is the policy of the group to recognise in income only the undisputed interest which is received in cash There are other less signiﬁcant items of dispute being discussed with the tax authorities. 10. Dividends 2017 2016 $’000 $’000 Amounts recognised as distributions to equity holders: Preference dividends of 9p per share (2016: 9p per share) 7,777 7,402 7,777 7,402 11. Loss per share 2017 2016 $’000 $’000 Basic and diluted loss for the purpose of calculating loss per share * (27,408) (17,800) ’000 ’000 Weighted average number of ordinary shares for the purpose of basic and diluted loss per share 40,510 36,950 * Being net loss attributable to ordinary shareholders O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 91 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 92 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 12. Goodwill 2017 2016 $’000 $’000 Beginning of year 12,578 12,578 End of year 12,578 12,578 The goodwill of $12.6 million arose from the acquisition by the company in 2006 of a non-controlling interest in the issued ordinary share capital of Makassar Investments Limited, the parent company of REA Kaltim, for a consideration of $19.0 million and has an indeﬁnite life. The goodwill is reviewed for impairment as explained under “Goodwill” in “Accounting policies (group)”. Accordingly, the oil palm business in Indonesia is regarded as the cash generating unit to which the goodwill relates. The recoverable amount of the goodwill has been assessed by comparing the carrying value per planted hectare of the group’s oil palm plantations with publicly disclosed valuations conducted recently of Indonesian plantations held by other groups. Based upon their review, the directors have concluded that no impairment of goodwill is required. 13. Intangible assets 2017 2016 $’000 $’000 Beginning of year 5,265 – Additions 112 – Transfers from property, plant and equipment – 4,123 Transfers from deferred charges – 1,142 End of year 5,377 5,265 Amortisation: Beginning of year 1,089 – Additions 811 74 Transfers from property, plant and equipment – 124 Transfers from deferred charges – 891 End of year 1,900 1,089 Carrying amount: Beginning of year 4,176 – End of year 3,477 4,176 Computer software that is not integral to an item of property, plant and equipment is recognised separately as an intangible asset. 92 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 93 14. Property, plant and equipment Plantings Buildings Plant, Construction Total and structures equipment in progress and vehicles $’000 $’000 $’000 $’000 $’000 Cost: At 1 January 2016 178,921 239,799 110,043 9,931 538,694 Additions 7,104 18,082 2,173 3,778 31,137 Exchange differences – – (63) – (63) Disposals (24) (16) (439) – (479) Transfers to / (from) construction in progress – 1,008 82 (1,090) – Transfers to intangible assets – – (124) (3,999) (4,123) Transfers to deferred charges – – – (3,025) (3,025) Transfers to current receivables (4) – – – (4) Transfers to income statement (141) – – – (141) At 31 December 2016 185,856 258,873 111,672 5,595 561,996 Opening balance reclassification 3,966 (3,966) – – – Additions 11,547 17,605 1,008 1,678 31,838 Transfers to / (from) construction in progress – 2,128 69 (2,197) – At 31 December 2017 201,369 274,640 112,749 5,076 593,834 Accumulated depreciation: At 1 January 2016 8,689 22,033 39,122 – 69,844 Charge for year 9,082 5,076 6,608 – 20,766 Transfers to intangible assets – – (124) – (124) Disposals – (11) (401) – (412) At 31 December 2016 17,771 27,098 45,205 – 90,074 Charge for year 9,190 5,281 6,948 – 21,419 At 31 December 2017 26,961 32,379 52,153 – 111,493 Carrying amount: At 31 December 2017 174,408 242,261 60,596 5,076 482,341 At 31 December 2016 168,085 231,775 66,467 5,595 471,922 The depreciation charge for the year includes $15,000 (2016: $313,000) which has been capitalised as part of additions to plantings and buildings and structures. At the balance sheet date, the book value of ﬁnance leases included in property, plant and equipment was $nil (2016: $nil). At the balance sheet date, the group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to $8.2 million (2016: $1.4 million). At the balance sheet date, property, plant and equipment of $328.5 million (2016: $298.6 million) had been charged as security for bank loans. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 93 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 94 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 15. Land titles 2017 2016 $’000 $’000 Cost: Beginning of year 38,903 38,536 Additions 948 367 End of year 39,851 38,903 Accumulated amortisation: Beginning of year 4,673 4,241 Charge for year – 432 End of year 4,673 4,673 Carrying amount: End of year 35,178 34,230 Beginning of year 34,230 34,295 Balances classiﬁed as land titles represent amounts invested in land utilised for the purpose of the plantation operations in Indonesia. At 31 December 2017, certiﬁcates of HGU had been obtained in respect of areas covering 76,127 hectares (2016: 70,584 hectares). An HGU is effectively a government lease entitling the lessee to utilise the land leased for agricultural and related purposes. Retention of an HGU is subject to payment of annual land taxes in accordance with prevailing tax regulations. HGUs are normally granted for an initial term of 30 years and are renewable on expiry of such term. At the balance sheet date, land titles of $13.2 million (2016: $15.2 million) had been charged as security for bank loans (see note 24). 16. Stone and coal interests 2017 2016 $’000 $’000 Stone company 19,172 17,435 Coal companies 21,705 22,773 Provision against loan to coal companies (3,000) (3,000) 37,877 37,208 Interest bearing loans have been made to two Indonesian companies that, directly and through a further Indonesian company, own rights in respect of certain stone and coal concessions in East Kalimantan Indonesia together, with related balances; such loans are repayable not later than 2020. Pursuant to the arrangements between the group and its local partners, the company’s subsidiary, KCC Resources Limited (“KCC”), has the right, subject to satisfaction of local regulatory requirements, to acquire the three concession holding companies at original cost on a basis that will give the group (through KCC) 95 per cent ownership with the balance of 5 per cent remaining owned by the local partners. Under current regulations such rights cannot be exercised. In the meantime, the concession holding companies are being ﬁnanced by loan funding from the group and no dividends or other distributions or payments may be paid or made by the concession holding companies to the local partners without the prior agreement of KCC. A guarantee has been executed by the stone concession company in respect of the amounts owed to the group by the two coal concession companies. The directors have carried out a recoverability assessment of the loans by which the group is funding the concession holding companies. Each concession holding company has been treated as a cash-generating unit and its recoverable amount has been estimated on the basis of value in use, applying an appropriate discount rate and, where applicable, taking into account cross guarantees. No impairment charge has been considered necessary in the 2017 consolidated income statement (2016: $nil). 94 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 95 17. Subsidiaries A list of the subsidiaries, including the name, country of incorporation, activity, registered ofﬁce address and proportion of ownership is given in note (iv) to the company’s individual ﬁnancial statements. 18. Inventories 2017 2016 $’000 $’000 Agricultural produce 4,417 6,921 Engineering and other operating inventory 7,080 8,846 11,497 15,767 Agricultural produce inventory is carried at fair value less selling costs. Engineering and other operating inventory is carried at cost less any amounts provided against which approximates its fair value. Inventory with a carrying value of $1.2 million is subject to a floating charge as security for a bank loan. At the balance sheet date, inventories of $11.1 million (2016: $13.5 million) had been charged as security for bank loans (see note 24). 19. Biological assets Biological assets comprise the growing produce on the group's oil palms and are carried at fair value. The basis of valuation is set out under “Biological assets” in Accounting policies (group). Biological assets are classiﬁed as level 3 in the fair value hierarchy prescribed by IFRS 7 “Financial instruments: Disclosures” as no transactions occur in growing produce prior to harvest. 2017 2016 $’000 $’000 Beginning of year 2,037 2,105 Fair value loss taken to income (110) (68) End of year 1,927 2,037 At the balance sheet date, biological assets of $1.9 million (2016: $2.0 million) had been charged as security for bank loans (see note 24). 20. Investments 2017 2016 $’000 $’000 R.E.A. Holdings plc 7.5 per cent US dollar notes 2022 2,730 9,880 2,730 9,880 $7,150,000 nominal of the 7.5 per cent US dollar notes 2022 (“2022 dollar notes”) acquired in 2016 at 100% of their principal amount by R.E.A. Services Limited (a wholly owned subsidiary of the company) were sold during 2017. The 2022 notes were sold in tranches over the course of the year at prices of minimum 96.5 per cent to maximum 99.5 per cent of the nominal value of the notes. All of the $2,730,000 2022 dollar notes held at 31 December have now been sold at 96.75 per cent. of the nominal value of the notes. The company has designated the above holdings as available-for-sale investments carried at cost. The directors consider that the fair value of the investments approximates cost. The investments are quoted on the London Stock Exchange. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 95 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 96 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 21. Trade and other receivables 2017 2016 $’000 $’000 Due from sale of goods 1,940 10,269 Prepayments and advance payments 6,975 8,703 Advance payment of taxation 11,321 15,236 Deposits and other receivables 19,044 8,346 39,280 42,554 Sales of goods are normally made on a cash against documents basis with an average credit period (which takes account of customer deposits as disclosed in note 29) of 19 days (2016: 11 days). The directors consider that the carrying amount of trade and other receivables approximates their fair value. At the balance sheet date, trade and other receivables of $11.0 million had been charged as security for bank loans (see note 24). 22. Cash and cash equivalents Cash and cash equivalents comprise cash held by the group and short-term bank deposits. The Moody’s prime rating of short term bank deposits amounting to $5.5 million (2016: $24.6 million) is set out in note 23 under the heading “Credit risk”. At 31 December 2017, $20,000 (2016: $45,000) of total bank deposits were subject to charges. 23. Financial instruments Capital risk management The group manages as capital its debt, which includes the borrowings disclosed in notes 24 to 26 and notes 28 and 29, cash and cash equivalents and equity attributable to shareholders of the parent, comprising issued ordinary and preference share capital, reserves and retained earnings as disclosed in notes 30 to 33. The group is not subject to externally imposed capital requirements. The directors’ policy in regard to the capital structure of the group is to seek to enhance returns to holders of the company's ordinary shares by meeting a proportion of the group's funding needs with prior ranking capital and to constitute that capital as a mix of preference share capital and borrowings from ﬁnancial institutions and the public debt market, in proportions which suit, and as respects borrowings that have a maturity proﬁle which suits, the assets that such capital is ﬁnancing. In so doing, the directors regard the company’s preference share capital as permanent capital and then seek to structure the group's borrowings so that shorter term bank debt is used only to ﬁnance working capital requirements while debt funding for the group's development programme is sourced from issues of listed debt securities and medium term borrowings from ﬁnancial institutions. Net debt to equity ratio Net debt, equity and the net debt to equity ratio at the balance sheet date were as follows: 2017 2016 $’000 $’000 Debt * 220,008 229,702 Cash and cash equivalents (5,545) (24,593) Investments (2,730) (9,880) Net debt 211,733 195,229 * Being the book value of long and short term borrowings as detailed in the table below under “Fair value of ﬁnancial instruments”. Equity (including non-controlling interests) 276,735 309,550 Net debt to equity ratio 76.5% 66.3% 96 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 97 23. Financial instruments - continued Signiﬁcant accounting policies Details of the signiﬁcant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of ﬁnancial instrument are disclosed in “Accounting policies (group)” above. Categories of ﬁnancial instruments Non-derivative ﬁnancial assets as at 31 December 2017 comprised loans, investments and receivables (including stone and coal interests) and cash and cash equivalents amounting to $65.2 million (2016: $90.6 million). Non-derivative ﬁnancial liabilities as at 31 December 2017 comprised liabilities at amortised cost amounting to $263.5 million (2016: $280.6 million). As explained in note 16, conditional arrangements exist for the group to acquire at historic cost the shares in the Indonesian companies owning rights over certain stone and coal concessions. The directors have attributed a fair value of zero to these interests in view of the prior claims of loans to the concession owning companies and the present stage of the operations. Financial risk management objectives The group manages the ﬁnancial risks relating to its operations through internal reports which permit the degree and magnitude of such risks to be assessed. These risks include market risk, credit risk and liquidity risk. The group seeks to reduce risk by using, where appropriate, derivative ﬁnancial instruments to hedge risk exposures. The use of derivative ﬁnancial instruments is governed by group policies set by the board of directors of the company. The board also sets policies on foreign exchange risk, interest rate risk, credit risk, the use of non-derivative ﬁnancial instruments, and the investment of excess liquidity. Compliance with policies and exposure limits is reviewed on a continuous basis. The group does not enter into or trade ﬁnancial instruments, including derivative ﬁnancial instruments, for speculative purposes. Market risk The ﬁnancial market risks to which the group is primarily exposed are those arising from changes in interest rates and foreign currency exchange rates. The group’s policy as regards interest rates is to borrow whenever economically practicable at ﬁxed interest rates, but where borrowings are raised at ﬂoating rates the directors would not normally seek to hedge such exposure. The 2020 sterling notes and the 2022 dollar notes carry interest at ﬁxed rates of, respectively, 8.75 and 7.5 per cent per annum. In addition, the company’s preference shares carry an entitlement to a ﬁxed annual dividend of 9 pence per share. Interest is payable on drawings under Indonesian rupiah term loan facilities varying between 1.2 per cent and 4.8 per cent (2016: between 1.2 per cent and 4.8 per cent) above the Jakarta Inter Bank Offer Rate with the exception of one bank loan which bears interest at a ﬁxed rate of 11.5 per cent (2016: 11.5 per cent). A one per cent increase in interest applied to those ﬁnancial instruments shown in the table below entitled “Fair value of ﬁnancial instruments” as held at 31 December 2017 which carry interest at ﬂoating rates would have resulted over a period of one year in a pre-tax proﬁt (and equity) decrease of approximately $1.3 million (2016: pre-tax proﬁt (and equity) decrease of $1.1 million). The group regards the US dollar as the functional currency of most of its operations and formerly sought to ensure that, as respects that proportion of its investment in the operations that was met by borrowings, it had no material currency exposure against the US dollar. Accordingly, where borrowings were incurred in a currency other than the US dollar, the group endeavoured to cover the resultant currency exposure by way of a debt swap or other appropriate currency hedge. The receipt by REA Kaltim during 2011 of an Indonesian tax assessment on its 2008 proﬁts seeking to disallow, for tax purposes, losses on certain debt swaps called into question the wisdom of entering into currency hedges. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 97 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 98 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 23. Financial instruments - continued In the light of the decision by the Jakarta Tax Court in 2014 in REA Kaltim’s favour regarding the disputed losses, the directors have considered whether the group should revert to its previous policy of hedging non-dollar exposures against the dollar. They continue to believe that, given that tax law in Indonesia is uncertain and that precedent is often not taken into account in Indonesian judicial decisions, the group will be best served going forward by simply maintaining a balance between its borrowings in different currencies and avoiding any new currency hedging transactions. Accordingly, the group will in future regard some exposure to currency risk on its non-dollar borrowing as an inherent and unavoidable risk of its business. Whilst interest rates payable on Indonesian rupiah borrowings are higher than on dollar borrowings, the directors believe that such higher rates reﬂect the fact that the Indonesian rupiah is a weak currency and that the higher cost that such borrowings entail is likely over time to be offset by exchange gains on the borrowings concerned. The group has never covered, and does not intend in future to cover, the currency exposure in respect of the component of the investment in its operations that is ﬁnanced with sterling denominated shareholder capital. The group’s policy is to maintain a cash balance in sterling sufﬁcient to meet its projected sterling expenditure for a period of between six and twelve months and a limited cash balance in Indonesian rupiah. At the balance sheet date, the group had non US dollar monetary items denominated in pounds sterling and Indonesian rupiah. A 5 per cent strengthening of the pound sterling against the US dollar would have resulted in a loss dealt with in the consolidated income statement and equity of $2.1 million on the net sterling denominated non-derivative monetary items (2016: loss $2.3 million). A 5 per cent strengthening of the Indonesian rupiah against the US dollar would have resulted in a loss dealt with in the consolidated income statement and equity of $8.6 million on the net Indonesian rupiah denominated, non-derivative monetary items (2016: loss of $6.9 million). Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in ﬁnancial loss to the group. The directors consider that the group is not exposed to any major concentrations of credit risk. At 31 December 2017, 90 per cent of bank deposits were held with banks with a Moody’s prime rating of P1 and 10 per cent with a bank with a Moody’s prime rating of P2. Substantially all sales of goods are made on the basis of cash against documents or letters of credit. At the balance sheet date, no trade receivables were past their due dates, nor were any impaired; accordingly no bad debt provisions were required. The maximum credit risk exposures in respect of the group’s ﬁnancial assets at 31 December 2017 and 31 December 2016 equal the amounts reported under the corresponding balance sheet headings. Liquidity risk Ultimate responsibility for liquidity risk management rests with the board of directors of the company, which has established an appropriate framework for the management of the group’s short, medium and long-term funding and liquidity requirements. Within this framework, the board continuously monitors forecast and actual cash ﬂows and endeavours to maintain adequate liquidity in the form of cash reserves and borrowing facilities while matching the maturity proﬁles of ﬁnancial assets and liabilities. Undrawn facilities available to the group at balance sheet date are disclosed in note 24. The board reviews the cash forecasting models for the operation of the plantations and compares these with the forecast outﬂows for debt obligations and projected capital expenditure programmes for the plantations, applying sensitivities to take into account perceived major uncertainties. In their review, the directors place the greatest emphasis on the cash ﬂow of the ﬁrst two years. 98 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 99 23. Financial instruments - continued Non-derivative ﬁnancial instruments The following tables detail the contractual maturity of the group’s non-derivative ﬁnancial liabilities. The tables have been drawn up based on the undiscounted amounts of the group’s ﬁnancial liabilities based on the earliest dates on which the group can be required to discharge those liabilities. The table includes liabilities for both principal and interest. Weighted Under Between Over 2 Total average 1 year 1 and 2 years interest rate years 2017 % $’000 $’000 $’000 $’000 Bank loans 10.9 39,039 51,108 53,575 143,722 US dollar notes - repayable 2022 8.5 1,803 1,803 28,542 32,148 Sterling notes - repayable 2020 10.1 3,793 3,794 45,881 53,468 Non-controlling shareholder loans - US dollar 6.5 7,735 7,315 6,894 21,944 Non-controlling shareholder loans - sterling 10.4 4,624 4,259 3,892 12,775 Trade and other payables, and customer deposits – 43,255 – – 43,255 100,249 68,279 138,784 307,312 Weighted Under Between Over 2 Total average 1 year 1 and 2 years interest rate years 2016 % $’000 $’000 $’000 $’000 Bank loans 11.0 38,269 15,455 83,210 136,934 US dollar notes - repayable 2017 8.5 21,813 – – 21,813 US dollar notes - repayable 2022 8.5 901 1,803 30,344 33,048 Sterling notes - repayable 2015/2017 10.4 11,231 – – 11,231 Sterling notes - repayable 2020 10.1 3,434 3,436 45,094 51,964 Non-controlling shareholder loans - US dollar 6.0 460 3,026 5,593 9,079 Non-controlling shareholder loans - sterling 10.6 504 2,101 3,703 6,308 Trade and other payables, and customer deposits – 31,385 – – 31,385 107,997 25,821 167,944 301,762 At 31 December 2017, the group’s non-derivative ﬁnancial assets (other than receivables) comprised cash, investments and deposits of $8.3 million (2016: $34.5 million) carrying a weighted average interest rate of 2.8 per cent (2016: nil per cent) all having a maturity of under one year, and stone and coal interests of $37.9 million (2016: $37.2 million) details of which are given in note 16. Fair value of ﬁnancial instruments The table below provides an analysis of the book values and fair values of ﬁnancial instruments, excluding receivables and trade payables and Indonesian coal interests, as at the balance sheet date. Investments, cash and deposits, dollar notes and sterling notes are classiﬁed as level 1 in the fair value hierarchy prescribed by IFRS 7 “Financial instruments: disclosures”. (Level 1 includes instruments where inputs to the fair value measurements are quoted prices in active markets). All other ﬁnancial instruments are classiﬁed as level 3 in the fair value hierarchy. (Level 3 includes instruments which have no observable market data to provide inputs to the fair value measurements). No reclassiﬁcations between levels in the fair value hierarchy were made during 2017 (2016: none). O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 99 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 100 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 23. Financial instruments - continued 2017 2017 2016 2016 Book value Fair value Book value Fair value $’000 $’000 $’000 $’000 Cash and deposits* 5,545 5,545 24,593 24,593 Investments** 2,730 2,730 9,880 9,880 Bank debt - within one year** (295) (295) – – Bank debt – within one year* (27,845) (27,845) (28,628) (28,628) Bank debt - after more than one year** (17,936) (17,936) – – Bank debt - after more than one year* (79,055) (79,055) (97,771) (97,771) Loans from non-controlling shareholder - after more than one year* (29,864) (29,864) (12,469) (12,469) US dollar notes - repayable 2017** – – (20,048) (20,206) US dollar notes - repayable 2022** (23,649) (23,074) (23,646) (24,035) Sterling notes - repayable 2015/2017** – – (10,103) (10,143) Sterling notes - repayable 2020** (41,364) (42,857) (37,037) (38,553) Net debt (211,733) (212,651) (195,229) (197,332) * Bearing interest at ﬂoating rates ** Bearing interest at ﬁxed rates The fair values of cash and deposits and bank debt approximate their carrying values since these carry interest at current market rates. The fair value of investments approximates their carrying value. The fair values of the dollar notes and sterling notes are based on the latest prices at which those notes were traded prior to the balance sheet dates. Changes in liabilities arising from ﬁnancing activities and analysis of movement in borrowings The table below details changes in the group's liabilities arising from ﬁnance activities, including both cash and non-cash changes. Liabilities from ﬁnancing activities are those for which cash ﬂows were, or future cash ﬂows will be classiﬁed in the group's consolidated cash ﬂow statement as cashﬂows from ﬁnancing activities. At 1 Financing Non-cash At 31 January cash flows other December 2017 changes 2017 $’000 $’000 $’000 $’000 Bank debt (126,399) 398 870 (125,131) Loan from non-controlling shareholder (12,469) (16,586) (809) (29,864) US dollar notes - repayable 2017 (20,048) 20,156 (108) – US dollar notes - repayable 2022 (23,646) – (3) (23,649) Sterling notes - repayable 2017 (10,103) 11,154 (1,051) – Sterling notes - repayable 2020 (37,037) – (4,327) (41,364) Total liabilities from financing activities (229,702) 15,122 (5,428) (220,008) 24. Bank loans 2017 2016 $’000 $’000 Bank loans 125,131 126,399 The bank loans are repayable as follows: On demand or within one year 28,140 28,628 Between one and two years 44,766 5,997 After two years 52,225 91,774 125,131 126,399 Amount due for settlement within 12 months (shown under current liabilities) 28,140 28,628 Amount due for settlement after 12 months 96,991 97,771 125,131 126,399 100 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 101 All bank loans are denominated in Indonesian rupiah (2016: all denominated in Indonesian rupiah) and are at ﬂoating rates, thus exposing the group to interest rate risk. The weighted average interest rate in 2017 was 10.9 per cent (2016: 11 per cent). Bank loans of $125.1 million (2016: $126.4 million) are secured on the land, plantations, property, plant and equipment and certain current assets owned by REA Kaltim, PT Kutai Mitra Sejahtera, PT Putra Bongan Jaya and PT Sasana Yudha Bhakti having an aggregate book value of $366 million (2016: $343 million), and are the subject of an unsecured guarantee by the company and REA Kaltim. The banks are entitled to have recourse to their security on usual banking terms. Under the terms of its bank facilities, certain plantation subsidiaries are restricted to an extent in the payment of interest on borrowings from, and on the payment of dividends to, other group companies. The directors do not believe that the applicable covenants will affect the ability of the company to meet its cash obligations. At the balance sheet date, the group had undrawn Indonesian rupiah denominated facilities of $7.9 million (2016: $14.3 million). 25. Sterling notes The sterling notes comprise £31.9m nominal of 8.75 per cent guaranteed 2020 sterling notes (2016: £31.9 million nominal of 8.75 per cent guaranteed 2020 sterling notes) issued by the company’s subsidiary, REAF. As at 31 December 2016 the sterling notes also included £8.3 million nominal of 9.5 per cent guaranteed 2015/17 sterling notes. £298,000 of these notes were purchased for cancellation prior to the repayment date and the balance were repaid on 21 December 2017 at par plus accrued interest. The sterling notes are guaranteed by the company and another wholly owned subsidiary of the company, REAS, and are secured principally on unsecured loans made by REAS to Indonesian plantation operating subsidiaries of the company. Unless previously redeemed or purchased and cancelled by the issuer, the sterling notes are repayable on 31 August 2020. The repayment obligation in respect of the sterling notes of £31.9 million ($42.6 million) is carried in the balance sheet net of the unamortised balance of the note issuance costs. If a person or group of persons acting in concert obtains the right to exercise more than 50 per cent of the votes that may generally be cast at a general meeting of the company, each holder of sterling notes has the right to require that the notes held by such holder be repaid at 101 per cent of par, plus any interest accrued thereon up to the date of completion of the repayment. 26. US dollar notes The US dollar notes comprise $24.0 million nominal of 7.5 per cent dollar notes 2022 (“2022 dollar notes”) (2016: $24.0 million nominal of 2022 dollar notes) and are stated net of the unamortised balance of the note issuance costs. As at 31 December 2016 the US dollar notes also included $20.2 million nominal of 7.5 per cent dollar notes 2017 (“2017 dollar notes”) which the company repaid on 30 June 2017 at par plus accrued interest. The 2022 US dollar notes are unsecured obligations of the company and are repayable on 30 June 2022. The repayment obligation in respect of the 2022 US dollar notes of $24.0 million is carried in the balance sheet net of the unamortised balance of the note issuance costs. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 101 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 102 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 27. Deferred tax The following are the major deferred tax assets and liabilities recognised by the group and the movements thereon during the year and preceding year: Deferred tax assets / (liabilities) Plantings Other Income/ Agricultural Tax Total property, expenses* produce losses plant and and other equipment inventory $’000 $’000 $’000 $’000 $’000 $’000 At 1 January 2016 (45,095) (24,498) (15,983) (409) 15,549 (70,436) Credit/(charge) to income for the year 1,397 (280) 2,308 (207) (3,591) (373) Credit to comprehensive income for the year** – – 143 – – 143 Exchange differences*** 475 2,053 (318) 2 405 2,617 At 31 December 2016 (43,223) (22,725) (13,850) (614) 12,363 (68,049) Credit/(charge) to income for the year 49 1,098 (269) 312 (2,636) (1,446) Credit to comprehensive income for the year** – – 41 – – 41 Exchange differences*** (249) (3) 48 – (75) (279) At 31 December 2017 (43,423) (21,630) (14,030) (302) 9,652 (69,733) Deferred tax assets – 4 211 – 9,652 9,867 Deferred tax liabilities (43,423) (21,634) (14,241) (302) – (79,600) At 31 December 2017 (43,423) (21,630) (14,030) (302) 9,652 (69,733) Deferred tax assets – 43 367 8 12,363 12,781 Deferred tax liabilities (43,223) (22,768) (14,217) (622) – (80,830) At 31 December 2016 (43,223) (22,725) (13,850) (614) 12,363 (68,049) * Includes income, gains or expenses recognised for reporting purposes, but not yet charged to or allowed for tax. ** Relating to actuarial losses. *** Included in the consolidated statement of comprehensive income. At the balance sheet date, the group had unused tax losses of $39.7 million (2016: $50.5 million) available to be applied against future proﬁts. A deferred tax asset of $9.7 million (2016: $12.4 million) has been recognised in respect of these losses, which are expected to be used in the future based on the group’s projections. Tax losses of $3.5 million (2016: nil) incurred by the Indonesian plantation subsidiaries have not been recognised in deferred tax as these may not be recoverable against future taxable proﬁts within the statutory ﬁve-year limit (see also note 9). A tax loss of $788,000 incurred by the group’s coal subsidiary in 2017 (2016: tax loss $462,000) has not been recognised and at the balance sheet date; tax losses aggregating $7.7 million incurred by the group’s coal subsidiary have not been recognised; these tax losses expire after ﬁve years. At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognised was $8.6 million (2016: $6.1 million). No liability has been recognised in respect of these differences because the group is in a position to control the reversal of the temporary differences and it is probable that such differences will not reverse signiﬁcantly in the foreseeable future. The temporary difference of $43.4 million (2016: $43.2 million) in respect of plantings arises from their recognition prior to 2015 at fair value in the group accounts, compared with their historic base cost in the local accounts of overseas subsidiaries. From 2015 onwards this temporary difference reverses as the plantings are depreciated over their remaining useful life. 102 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 103 28. Other loans and payables 2017 2016 $’000 $’000 Indonesian retirement benefit obligations 8,725 7,037 Loans from non-controlling shareholder 29,864 12,469 38,589 19,506 Repayable as follows: On demand or within one year (shown under current liabilities) 10,469 519 In the second year 10,469 5,195 In the third to fifth years inclusive 11,497 9,871 After five years 6,154 3,921 Amount due for settlement after 12 months 28,120 18,987 38,589 19,506 Liabilities by currency: Sterling 10,441 4,746 US dollar 19,423 7,723 Indonesian rupiah 8,725 7,037 38,589 19,506 Further details of the retirement beneﬁt obligations are set out in note 37. The directors estimate that the fair value of other loans and payables approximates their carrying value. 29. Trade and other payables 2017 2016 $’000 $’000 Trade purchases and ongoing costs 11,520 12,309 Customer deposits 23,784 14,926 Other tax and social security 4,054 3,730 Accruals 14,903 11,172 Other payables 7,951 1,289 62,212 43,426 The average credit period taken on trade payables is 68 days (2016: 30 days). The directors estimate that the fair value of trade and other payables approximates their carrying value. 30. Share capital 2017 2016 £’000 £’000 Authorised (in sterling): 85,000,000 – 9 per cent cumulative preference shares of £1 each (2016: 85,000,000) 85,000 85,000 50,000,000 – ordinary shares of 25p each (2016: 50,000,000) 12,500 12,500 97,500 97,500 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 103 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 104 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 30. Share capital - continued 2017 2016 $’000 $’000 Issued and fully paid (in US dollars): 72,000,000 – 9 per cent cumulative preference shares of £1 each (2016: 63,641,232) 116,516 105,414 40,509,529 – ordinary shares of 25p each (2016: 40,509,529) 17,013 17,013 132,500 – ordinary shares of 25p each held in treasury (2016: 132,500) (1,001) (1,001) 132,528 121,426 The preference shares entitle the holders thereof to payment, out of the proﬁts of the company available for distribution and resolved to be distributed, of a ﬁxed cumulative preferential dividend of 9 per cent per annum on the nominal value of the shares and to repayment, on a winding up of the company, of the amount paid up on the preference shares and any arrears of the ﬁxed dividend in priority to any distribution on the ordinary shares. Subject to the rights of the holders of preference shares, holders of ordinary shares are entitled to share equally with each other in any dividend paid on the ordinary share capital and, on a winding up of the company, in any surplus assets available for distribution among the members. Changes in share capital: • On 16 October 2017 8,358,768 preference shares were issued, fully paid, by way of a placing at £1 per share to qualiﬁed investors (total consideration £8,359,000 - $11,102,000. The middle-market price at close of business on 9 October 2017 (being the date at which the terms of issue were ﬁxed) was £1.045. There have been no changes in ordinary shares held in treasury during the year. 31. Share premium account $’000 At 1 January 2016 30,683 Issue of new ordinary shares (cash) 12,289 Cost of issues (387) At 31 December 2016 42,585 Cost of issues (184) At 31 December 2017 42,401 32. Translation reserve 2017 2016 $’000 $’000 Beginning of year (39,127) (46,282) Exchange differences on translation of foreign operations (11,419) 5,222 Exchange differences on deferred tax (279) 2,617 Attributable to non-controlling interests (72) (684) End of year (50,897) (39,127) 33. Retained earnings 2017 2016 $’000 $’000 Beginning of year 161,839 187,481 Sale of non-controlling shareholding in a subsidiary 807 (7,416) Loss for the year after preference dividend (27,572) (18,226) End of year 135,074 161,839 104 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 105 34. Non-controlling interests 2017 2016 $’000 $’000 Beginning of year 22,827 1,652 Sale of non-controlling shareholding in a subsidiary – 21,401 Share of result for the year (5,270) (910) Exchange translation differences 72 684 End of year 17,629 22,827 35. Reconciliation of operating loss to operating cash ﬂows 2017 2016 $’000 $’000 Operating loss (2,164) (5,026) Amortisation of intangible assets 811 74 Depreciation of property, plant and equipment 21,419 20,766 Decrease / (increase) in fair value of agricultural produce inventory 1,137 (632) Decrease in value of growing produce 110 – Amortisation of prepaid operating lease rentals – 432 Amortisation of sterling and dollar note issue expenses 648 584 Loss on disposal of property, plant and equipment – 12 Operating cash flows before movements in working capital 21,961 16,210 Decrease / (increase) in inventories (excluding fair value movements) 3,133 (3,944) (Increase) / decrease in receivables 649 760 Increase in payables 20,174 13,136 Exchange translation differences (101) (791) Cash generated by operations 45,816 25,371 Taxes paid (6,627) (2,313) Tax refunds received 5,398 241 Interest paid (24,917) (20,701) Net cash from operating activities 19,670 2,598 No additions to property, plant and equipment during the year were ﬁnanced by new ﬁnance leases (2016: $nil). O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 105 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 106 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 36. Movement in net borrowings 2017 2016 $’000 $’000 Change in net borrowings resulting from cash flows: (Decrease) / increase in cash and cash equivalents (19,050) 8,874 Net decrease / (increase) in bank borrowings 398 (3,935) Increase in related party borrowings (16,586) (12,469) (35,238) (7,530) Redemption of 2017 sterling notes 11,154 – Redemption of 2017 dollar notes 20,156 – Issue of 2022 dollar notes – (345) Amortisation of sterling note issue expenses (537) (318) Amortisation of dollar note issue expenses (111) (266) (4,576) (8,459) Currency translation differences (4,780) 2,036 Net borrowings at beginning of year (205,109) (198,686) Net borrowings at end of year (214,465) (205,109) 37. Retirement beneﬁt obligations United Kingdom The company is the principal employer of the R.E.A. Pension Scheme (the “Scheme”) and a subsidiary company is a participating employer. The Scheme is a multi-employer contributory deﬁned beneﬁt scheme with assets held in a trustee-administered fund, which has participating employers outside the group. The Scheme is closed to new members. As the Scheme is a multi-employer scheme, in which the employers are unable to identify their respective shares of the underlying assets and liabilities (because there is no segregation of the assets), and does not prepare valuations on an IAS 19 basis, the group accounts for the Scheme as if it were a deﬁned contribution scheme. The company’s share of the total employer contribution is 5.4 per cent. A non-IAS 19 valuation of the Scheme was last prepared, using the attained age method, as at 31 December 2014. This method had been adopted in the previous valuation as at 31 December 2011 and in earlier valuations, as it was considered the appropriate method of calculating future service beneﬁts as the Scheme is closed to new members. At 31 December 2014 the Scheme had an overall marginal surplus of assets, when measured against the Scheme’s technical provisions, of £202,000 - $315,000. The technical provisions were calculated using assumptions of an investment return of 4.35 per cent pre-retirement and 2.80 per cent post-retirement and annual increases in pensionable salaries of 3.2 per cent. The basis for the inﬂationary revaluation of deferred pensions and increases to pensions in payment was changed from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) with effect from 1 January 2011 in line with the statutory change, except that the change does not apply to pension accrual from 1 January 2006, where the RPI still applies. The rates of increase in the RPI and the CPI were assumed to be 3.2 per cent and 2.45 per cent respectively. It was further assumed that both non-retired and retired members’ mortality would reﬂect S2PXA tables (light version) at 100 per cent and that non-retired members would take on retirement the maximum cash sums permitted from 1 January 2015. Had the Scheme been valued at 31 December 2014 using the projected unit method and the same assumptions, the overall result would have been similar. The Scheme has agreed a statement of funding principles with the principal employer and has also agreed a schedule of contributions with participating employers covering normal contributions which are payable at a rate calculated to cover future service beneﬁts under the Scheme. The Scheme had also agreed a recovery plan with participating employers which provided for recovery of the deﬁcit shown by the 31 December 2011 valuation through the payment of quarterly additional contributions over the period from 1 January 2013 to 30 September 2018. No contributions under that recovery plan were required to be made in 2017 nor is any projected for 2018. There are no agreed allocations of any surplus on either the wind-up of the Scheme or on any participant’s withdrawal from the Scheme. 106 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 107 37. Retirement beneﬁt obligations - continued The sensitivity of the surplus as at 31 December 2014 to variations in certain of the principal assumptions underlying the actuarial valuation as at that date is summarised below: Decrease in post-retirement investment returns by 0.1% Increase in base table mortality rates by 10% Increase in long term rate of mortality by 0.25% (Decrease) / increase in surplus $’000 (651) 1,439 (617) The next actuarial valuation will be made as at 31 December 2017. The valuation will not be available until the second half of this year and is therefore not reﬂected in these ﬁnancial statements. The company is responsible for contributions payable by other (non group) employers in the Scheme; such liability will only arise if other (non group) employers do not pay their contributions. There is no expectation of this and, therefore, no provision has been made. Indonesia In accordance with Indonesian labour laws, group employees in Indonesia are entitled to lump sum payments on retirement at the age of 55 years. The group records a provision in the ﬁnancial statements which is not ﬁnanced by a third party: accordingly there are no separate assets set aside to fund these entitlements. The provision is assessed at each balance sheet date by an independent actuary using the projected unit credit method. The principal assumptions used were as follows: 2017 2016 Discount rate (per cent) 7.19 8.45 Salary increases per annum (per cent) 6 6 Mortality table (Indonesia) (TM1) 111-2011 111-2011 Retirement age (years) 55 55 Disability rate (per cent of the mortality table) 10 10 The movement in the provision for employee service entitlements was as follows: 2017 2016 $’000 $’000 Balance at 1 January 7,037 5,651 Current service cost 1,208 958 Interest expense 595 533 Actuarial loss recognised in statement of comprehensive income – 571 Exchange (76) 139 Paid during the year (202) (815) Balance at 31 December (see note 28) 8,562 7,037 The amounts recognised in administrative expenses in the consolidated income statement were as follows: 2017 2016 $’000 $’000 Current service cost 1,208 958 Interest expense 595 533 1,803 1,491 Amount included as additions to property, plant and equipment – (114) 1,803 1,377 Estimated lump sum payments to Indonesian employees on retirement in 2018 are $504,000 (2017: $519,000). O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 107 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 108 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 38. Related party transactions Transactions between the company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the company and its subsidiaries are dealt with in the company’s individual ﬁnancial statements. Remuneration of key management personnel The remuneration of the directors, who are the key management personnel of the group, is set out below in aggregate for each of the categories speciﬁed in IAS 24 “Related party disclosures”. Further information about the remuneration of, and fees paid in respect of services provided by, individual directors is provided in the audited part of the “Directors’ remuneration report”. 2017 2016 $’000 $’000 Short term benefits 1,364 1,405 Termination benefits 258 – 1,622 1,405 Loan from related party During the year, REA Trading Limited, a related party, made unsecured loans to the company on commercial terms. The maximum amount was $7.4 million, all of which had been repaid by 31 December. This disclosure also complies with the requirements of the Listing Rule 9.8.4. 39. Rates of exchange 2017 2017 2016 2016 Closing Average Closing Average Indonesian rupiah to US dollar 13,548 13,400 13,436 13,369 US dollar to sterling 1.3435 1.29 1.2226 1.36 40. Events after the reporting period On 25 April 2018 the company announced the sale of PT REA Kaltim Plantation’s shareholding in PT Putra Bongan Jaya (“PBJ”), its 95 per cent subsidiary. The sale is conditional, inter alia, upon approval by the company’s shareholders and necessary consents of the Indonesian regulatory authorities. The gross sale proceeds are estimated to amount to approximately $85 million, from which are to be deducted borrowings from PBJ’s bankers projected at $26.0 million at completion. As a result, the net proceeds to the group are expected to amount, net of expenses, to approximately $57 million. Such net proceeds will be applied substantially in the reduction of group indebtedness. Completion is not expected to occur before 31 August 2018 and the sale agreement will lapse if the conditions have not been satisﬁed by 31 January 2019. The purchaser has deposited with the group, by way of an advance of the purchase price, the sum of $8 million. Should the agreement for the sale of PBJ not become unconditional, such amount will be repayable. The estimated sums disclosed above in relation to the gross and net sale proceeds will be recalculated immediately prior to completion. Based on current projections, the tax impact of the eventual sale is expected to be minimal. The PBJ plantation is a recently planted property but is not currently proﬁtable. Accordingly, its sale will not have a material negative impact on the immediate proﬁt outlook for the group. Otherwise there have been no material post balance sheet events that would require disclosure in, or adjustment to, these ﬁnancial statements. 108 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 109 41. Resolution of competing rights over certain plantation areas During 2017, the overall area of the group’s fully titled agricultural land increased from 70,584 hectares to 76,127 hectares following completion of the transfer to SYB and a local minority shareholder of PU shares the subject of exchange arrangements agreed in 2015 with PT Ade Putra Tanrajeng (“APT”). PU holds fully titled land areas of 9,097 hectares located on the southern side of the Belayan River opposite the SYB northern areas and is linked by a government road to the southern REA Kaltim areas. By way of exchange, SYB has agreed to transfer to APT 3,554 hectares of fully titled SYB land and has relinquished 2,212 hectares of untitled land allocations, both areas being the subject of overlapping mineral rights held by APT. Pending completion of the transfer of the 3,554 hectares, APT and its associates have been granted access to commence mining in this area. 42. Contingent liabilities In furtherance of Indonesian government policy which requires the owners of oil palm plantations to develop smallholder plantations, during 2009 and 2010 PT REA Kaltim Plantations (“REA Kaltim”) and PT Sasana Yudha Bhakti (“SYB”), both subsidiaries of the company, entered into agreements with three cooperatives to develop and manage land owned by the cooperatives as oil palm plantations. To assist with the funding of such development, the cooperatives have concluded various long term loan agreements with Bank Pembangunan Daerah Kalimantan Timur (“Bank BPD”), a regional development bank, under which the cooperatives may borrow in aggregate up to Indonesian rupiah 157 billion ($11.6 million) with amounts borrowed repayable over 14 years and secured on the lands under development (“the bank facilities”). REA Kaltim has guaranteed the obligations of two cooperatives as to payments of principal and interest under the respective bank facilities and, in addition, has committed to lend to the cooperatives any further funds required to complete the agreed development. REA Kaltim is entitled to a charge over the developments when the bank facilities have been repaid in full. SYB has guaranteed the obligations of the third cooperative on a similar basis. On maturity of the developments, the cooperatives are required to sell all crops from the developments to REA Kaltim and SYB respectively and to permit repayment of indebtedness to Bank BPD, REA Kaltim and SYB respectively out of the sale proceeds. As at 31 December 2017 the aggregate outstanding balances owing by the three cooperatives to Bank BPD amounted to Indonesian rupiah 113.3 billion ($8.4 million) (2016: Indonesian rupiah 121.4 billion - $9.0 million). 43. Operating lease commitments The group leases premises under operating leases in London, Balikpapan, and Singapore. These leases, which are renewable, run for periods of between 6 months and 10 years, and do not include contingent rentals, or options to purchase the properties. The future minimum lease payments under operating leases are as follows: 2017 2016 $’000 $’000 Within one year 304 212 In the second to fifth year inclusive 1,049 1,062 After five years 906 996 2,259 2,270 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 109 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 110 Company ﬁnancial statements Company balance sheet as at 31 December 2017 2017 2016 Note $’000 $’000 Non-current assets Investments (iv) 264,892 269,827 Deferred tax assets (v) 843 929 Total non-current assets 265,735 270,756 Current assets Trade and other receivables (vi) 5,482 26,146 Cash and cash equivalents (vii) 724 614 Total current assets 6,206 26,760 Total assets 271,941 297,516 Current liabilities Trade and other payables (viii) (6,710) (4,627) US dollar notes (ix) – (20,048) Amount owed to group undertaking (x) – (13,765) Total current liabilities (6,710) (38,440) Non-current liabilities US dollar notes (ix) (23,649) (23,646) Amount owed to group undertaking (x) (43,433) (38,944) Total non-current liabilities (67,082) (62,590) Total liabilities (73,792) (101,030) Net assets 198,149 196,486 Equity Share capital (xi) 132,528 121,426 Share premium account (xii) 42,401 42,585 Exchange reserve (xii) (4,300) (4,300) Profit and loss account (xii) 27,520 36,775 Total equity 198,149 196,486 The company reported a loss in the ﬁnancial year ended 31 December 2017 of $1.5 million (2016: loss $2.2 million). Approved by the board on 26 April 2018 and signed on behalf of the board. DAVID J BLACKETT Chairman 110 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 111 Company ﬁnancial statements Company statement of changes in equity for the year ended 31 December 2017 Share Share Exchange Profit Total capital premium reserve and loss Note $’000 $’000 $’000 $’000 $’000 At 1 January 2016 120,288 30,683 (4,300) 42,334 189,005 Total comprehensive income (xii) – – – 1,843 1,843 Issue of new ordinary shares (cash) (xi) 1,138 11,902 – – 13,040 Dividends to preference shareholders (iii) – – – (7,402) (7,402) At 31 December 2016 121,426 42,585 (4,300) 36,775 196,486 Total comprehensive income (xii) – – – (1,478) (1,478) Issue of new preference shares (cash) (xi) 11,102 (184) – – 10,918 Dividends to preference shareholders (iii) – – – (7,777) (7,777) At 31 December 2017 132,528 42,401 (4,300) 27,520 198,149 There are no gains or losses other than those recognised in the proﬁt and loss account. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c i a l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 111 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 112 Company ﬁnancial statements Company cash ﬂow statement for the year ended 31 December 2017 2017 2016 Note $’000 $’000 Net cash inflow / (outflow) from operating activities (xiv) 13,875 (6,925) Investing activities Interest received 7,104 7,592 Dividends and other distributions received from subsidiaries (xvi) – 4,028 Repayment of loans by subsidiary companies * 9,533 – New loans made to subsidiary companies * – (8,033) Further investment in stone and coal interests (2,339) (1,860) Net cash used in investing activities 14,298 (1,727) Financing activities Preference dividends paid (iii) (7,777) (7,402) Proceeds of issue of ordinary shares, less costs of issue – 13,040 Proceeds of issue of preference shares, less costs of issue (xi) 10,918 – Proceeds of issue of 2022 dollar notes, less costs of issue – (44) Redemption of 2017 dollar notes (ix) (20,156) (45) Repayment of loan to subsidiary company (x) (11,156) – New borrowings from related party (xvi) 7,400 – Repayment of borrowings from related party (xvi) (7,400) – Net cash (to) / from financing activities (28,171) 5,549 Cash and cash equivalents Net increase in cash and cash equivalents 2 351 Cash and cash equivalents at beginning of year 614 278 Effect of exchange rate changes 108 (15) Cash and cash equivalents at end of year (vii) 724 614 * Excluding amounts dealt with within “Further investment in stone and coal interests” 112 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 113 Company ﬁnancial statements Accounting policies (company) The accounting policies of R.E.A. Holdings plc (the “company”) are the same as those of the group, save as modiﬁed below. Basis of accounting Financial risk The company’s ﬁnancial risk is managed as part of the group’s strategy and policies as discussed in note 23 to the consolidated ﬁnancial statements. The company ﬁnancial statements are set out on pages 110 to 122. Taxation Separate ﬁnancial statements of the company are required by the Companies Act 2006, and these have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed for use by the European Union as at the date of approval of the ﬁnancial statements and therefore comply with Article 4 of the EU IAS Regulation. The statements are prepared under the historic cost convention except where otherwise stated in the accounting policies. By virtue of section 408 of the Companies Act 2006, the company is exempted from presenting a proﬁt and loss account. Current tax including UK corporation tax and foreign tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Deferred tax is calculated on the liability method. Deferred tax is provided on a non discounted basis on timing and other differences which are expected to reverse, at the rate of tax likely to be in force at the time of reversal. Deferred tax is not provided on timing differences which, in the opinion of the directors, will probably not reverse. Deferred tax assets are only recognised to the extent that it is regarded as more likely than not that there will be suitable taxable proﬁts from which the future reversal of timing differences can be deducted. Presentational currency Leases No assets are held under ﬁnance leases. Rentals under operating leases are charged to proﬁt and loss account on a straight-line basis over the lease term. The ﬁnancial statements of the company are presented in US dollars which is also considered to be the currency of the primary economic environment in which the company operates. References to “$” or “dollar” in these ﬁnancial statements are to the lawful currency of the United States of America. Adoption of new and revised standards The directors do not expect that the adoption of the standards listed on page 80 in Accounting policies (group) will have a material impact on the ﬁnancial statements of the company in future periods. Investments The company’s investments in its subsidiaries are stated at cost less any provision for impairment. Impairment provisions are charged to the proﬁt and loss account. Dividends received from subsidiaries are credited to the company’s proﬁt and loss account. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c i a l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 113 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 114 Company ﬁnancial statements Notes to the company ﬁnancial statements (i) Critical accounting judgements and key sources of estimation uncertainty In the application of the company’s accounting policies, which are described on page 113, the directors are required to make judgements, estimates and assumptions; these are based on historical experience and other factors that are considered to be relevant, and are reviewed on a regular basis. Actual values of assets and amounts of liabilities may differ from estimates. Revisions to estimates are recognised in the period in which the estimates are revised. In the opinion of the directors, all critical accounting judgements and key sources of estimation uncertainty relate to the group’s operations as disclosed in note 1 to the consolidated ﬁnancial statements and no such judgements or estimates apply to the company’s ﬁnancial statements. (ii) Auditor’s remuneration The remuneration of the company’s auditor is disclosed in note 5 to the company’s consolidated ﬁnancial statements as required by section 494(4)(a) of the Companies Act 2006. (iii) Dividends 2017 2016 $’000 $’000 Amounts recognised as distributions to equity holders: Preference dividends of 9p per share (2016: 9p per share) 7,777 7,402 7,777 7,402 Investments (iv) 2017 2016 $’000 $’000 Shares in subsidiaries 91,775 91,775 Loans 173,117 178,052 264,892 269,827 The movements were as follows: Shares Loans $’000 $’000 At 1 January 2016 91,775 178,714 Additions to loans – 10,846 Effect of exchange – (11,508) At 31 December 2016 91,775 178,052 Repayment of loans – (13,030) Additions to loans – 2,763 Effect of exchange – 5,332 At 31 December 2017 91,775 173,117 114 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 115 The subsidiaries at the year end, together with their countries of incorporation, activity, registered ofﬁce address and proportion of ownership, are listed below. Details of UK dormant subsidiaries are not shown. Class of Percentage Subsidiary Activity Registered Office shares owned Makassar Investments Limited (Jersey) Sub holding company Fifth ﬂoor, 37 Esplanade, St Helier, Jersey JE1 2TR Ordinary 100.0 PT Cipta Davia Mandiri (Indonesia) Plantation agriculture Gedung PAM Tower Lt.9 JL Jend. Sudirman Stal Kuda, Komp. Ordinary 80.8 BSB No. 47 RT 19, Kelurahan Damai Bahagia, Kecamatan Balikpapan Selatan 76114 Kalimantan Timur Indonesia PT Kartanegara Kumala Sakti (Indonesia) Plantation agriculture As for PT Cipta Davia Mandiri Ordinary 80.8 PT KCC Resources Indonesia (Indonesia) Stone and coal operations Plaza 5 Pondok Indah Blok B.06, JL Margaguna Raya, Gandaria Ordinary 95.0 Utara, Kebayoran Baru, Jakarta Selatan 12140 PT Kutai Mitra Sejahtera (Indonesia) Plantation agriculture As for PT Cipta Davia Mandiri Ordinary 80.8 PT Persada Bangun Jaya (Indonesia) Plantation agriculture As for PT Cipta Davia Mandiri Ordinary 80.8 PT Putra Bongan Jaya (Indonesia) Plantation agriculture As for PT Cipta Davia Mandiri Ordinary 80.8 PT REA Kaltim Plantations (Indonesia) Plantation agriculture As for PT Cipta Davia Mandiri Ordinary 85.0 PT Sasana Yudha Bhakti (Indonesia) Plantation agriculture As for PT Cipta Davia Mandiri Ordinary 80.8 PT Prasetia Utama (Indonesia) Plantation agriculture As for PT Cipta Davia Mandiri Ordinary 80.8 KCC Resources Limited (England and Wales) Sub holding company First Floor, 32-36 Great Portland Street, London W1W 8QX Ordinary 100.0 REA Finance B.V. (Netherlands) Group ﬁnance Amstelveenseweg 760, 1081 JK, Amsterdam, Netherlands Ordinary 100.0 R.E.A. Services Limited (England and Wales) Group ﬁnance and services First Floor, 32-36 Great Portland Street, London W1W 8QX Ordinary 100.0 REA Services Private Limited (Singapore) Group services 16 Collyer Quay #17-00 Singapore 049318 Ordinary 100.0 The entire shareholdings in Makassar Investments Limited, KCC Resources Limited, R.E.A. Services Limited, REA Finance B.V. and REA Services Private Limited are held directly by the company. All other shareholdings are held by subsidiaries. Covenants contained in credit agreements between certain of the company’s plantation subsidiaries and banks restrict the amount of dividend that may be paid to the UK without the consent of the banks to certain proportions of the relevant subsidiaries’ pre-tax proﬁts. The directors do not consider that such restrictions will have any signiﬁcant impact on the liquidity risk of the company. A dormant UK subsidiary, Jentan Plantations Limited, company registration number 06662767, has taken advantage of the exemption pursuant to Companies Act 2006 s394A from preparing and ﬁling individual accounts. (v) $’000 Deferred tax asset At 1 January 2016 978 Effect of change in tax rate (49) At 31 December 2016 929 Charge to income for the year (86) At 31 December 2017 843 There were no deferred tax liabilities at 1 January 2016, 31 December 2016 or 31 December 2017. At the balance sheet date, the company had unused tax losses of $4.7 million (2016: $4.9 million) available to be applied against future proﬁts. A deferred tax asset of $843,000 (2016: $929,000) has been recognised in respect of these losses as the company considers, based on ﬁnancial projections, that these losses will be utilised. The aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which tax liabilities have not been recognised are disclosed in note 27 to the consolidated ﬁnancial statements. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c i a l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 115 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 116 Company ﬁnancial statements Notes to the company ﬁnancial statements (continued) Trade and other receivables (vi) 2017 2016 $’000 $’000 Amount owing by group undertakings 5,398 26,035 Other debtors 71 88 Prepayments and accrued income 13 23 5,482 26,146 The directors consider that the carrying amount of trade and other receivables approximates their fair value. The amounts owing by group undertakings are non-interest bearing and repayable on demand. (vii) Cash and cash equivalents Cash and cash equivalents comprise short-term bank deposits. The Moody’s prime ratings of these deposits amounting to $724,000 (2016: $614,000) is set out in note 23 to the consolidated ﬁnancial statements under the heading “Credit risk”. (viii) Trade and other payables 2017 2016 $’000 $’000 Amount owing to group undertakings 2,202 561 Other creditors 25 442 Accruals 4,483 3,624 6,710 4,627 The directors consider that the carrying amount of trade and other payables approximates their fair value. The amounts owing to group undertakings are non-interest bearing and repayable on demand. (ix) US dollar notes The US dollar notes comprise $24.0 million nominal of 7.5 per cent dollar notes 2022 (“2022 dollar notes”) (2016: $24.0 million nominal of 2022 dollar notes) and are stated net of the unamortised balance of the note issuance costs. As at 31 December 2016 the US dollar notes also included $20.2 million nominal of 7.5 per cent dollar notes 2017 (“2017 dollar notes”) which the company repaid on 30 June 2017 at par plus accrued interest. The 2022 dollar notes are unsecured obligations of the company and are repayable on 30 June 2022. The repayment obligation in respect of the 2022 US dollar notes of $24.0 million is carried in the balance sheet net of the unamortised balance of the note issuance costs. (x) Amount owed to group undertaking Amount owed to group undertaking comprises an unsecured interest-bearing loan of £32.3m ($43.4 million) from REA Finance B.V. At the end of 2016 there were two unsecured interest-bearing loans totalling £43.1m ($52.7 million) of which £10.8m ($14.5 million) was repaid during 2017. 116 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 117 (xi) Share capital 2017 2016 £’000 £’000 Authorised (in sterling): 85,000,000 – 9 per cent cumulative preference shares of £1 each (2016: 85,000,000) 85,000 85,000 50,000,000 – ordinary shares of 25p each (2016: 50,000,000) 12,500 12,500 97,500 97,500 $’000 $’000 Issued and fully paid (in US dollars): 72,000,000 – 9 per cent cumulative preference shares of £1 each (2016: 63,641,232) 116,516 105,414 40,509,529 – ordinary shares of 25p each (2016: 40,509,529) 17,013 17,013 132,500 – ordinary shares of 25p each held in treasury (2016: 132,500) (1,001) (1,001) 132,528 121,426 The preference shares entitle the holders thereof to payment, out of the proﬁts of the company available for distribution and resolved to be distributed, of a ﬁxed cumulative preferential dividend of 9 per cent per annum on the nominal value of the shares and to repayment, on a winding up of the company, of the amount paid up on the preference shares and any arrears of the ﬁxed dividend in priority to any distribution on the ordinary shares. Subject to the rights of the holders of preference shares, holders of ordinary shares are entitled to share equally with each other in any dividend paid on the ordinary share capital and, on a winding up of the company, in any surplus assets available for distribution among the members. Changes in share capital: • On 16 October 2017 8,358,768 preference shares were issued, fully paid, by way of a placing at £1 per share to qualiﬁed investors (total consideration £8,359,000 - $11,102,000). The middle market price at close of business on 9 October 2017 (being the date at which the terms of issue were ﬁxed) was £1.045. There have been no changes in ordinary shares held in treasury during the year. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c i a l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 117 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 118 Company ﬁnancial statements Notes to the company ﬁnancial statements (continued) (xii) Movement in reserves Share Exchange Profit premium reserve and loss account account $’000 $’000 $’000 At 1 January 2016 30,683 (4,300) 42,334 Total comprehensive income – – 1,843 Dividends to preference shareholders – – (7,402) Issue of ordinary shares (cash) 12,289 – – Costs of issues (387) – – At 31 December 2016 42,585 (4,300) 36,775 At 1 January 2017 42,585 (4,300) 36,775 Total comprehensive income – – (1,478) Dividends to preference shareholders – – (7,777) Costs of issues (184) – – At 31 December 2017 42,401 (4,300) 27,520 As permitted by section 408 of the Companies Act 2006, a separate proﬁt and loss account dealing with the results of the company has not been presented. The loss before dividends recognised in the company’s proﬁt and loss account for the year is $1.5 million (2016: loss $2.2 million). (xiii) Financial instruments and risks Financial instruments The company’s ﬁnancial instruments comprise borrowings, cash and liquid resources and in addition certain debtors and trade creditors that arise from its operations. The main purpose of these ﬁnancial instruments is to raise ﬁnance for, and facilitate the conduct of, the company’s operations. The hierarchy for determining and disclosing the fair value of ﬁnancial instruments is set out in note 23 to the consolidated ﬁnancial statements. Loans from group undertakings are not included in the consolidated ﬁnancial statements but are considered to be level 3 in the hierarchy due to the lack of observable market data available. The table below provides an analysis of the book and fair values of ﬁnancial instruments excluding trade receivables and trade payables at the balance sheet date. 2017 2017 2016 2016 Book value Fair value Book value Fair value $’000 $’000 $’000 $’000 Cash and cash equivalents 724 724 614 614 US dollar notes - repayable 2017 – – (20,048) (20,206) US dollar notes - repayable 2022 (23,649) (23,074) (23,646) (24,035) Loan from REA Finance B.V. - repayable 2017 – – (13,765) (13,765) Loan from REA Finance B.V. - repayable 2020 (43,433) (43,433) (38,944) (38,944) Net debt (66,358) (65,783) (95,789) (96,336) The fair value of the dollar notes reﬂects the last price at which transactions in those notes were effected prior to the balance sheet dates. Risks The main risks arising from the company’s ﬁnancial instruments are liquidity risk, interest rate risk, credit risk and foreign currency risk. The board reviews and agrees policies for managing each of these risks. These policies have remained unchanged since the beginning of the year. It is, and was throughout the year, the company’s policy that no trading in ﬁnancial instruments be undertaken. 118 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 119 The company ﬁnances its operations through a mixture of share capital, retained proﬁts, loans from a group undertaking, borrowings in US dollars at ﬁxed rates and credit from suppliers. At 31 December 2017, the company had outstanding $24.0 million of 7.5 per cent dollar notes 2022 (2016: $24.0 million of 7.5 per cent dollar notes 2022 and $20.2 million of 7.5 per cent dollar notes 2017). The policy for liquidity risk management is disclosed in note 23 to the consolidated ﬁnancial statements together with the contractual maturity of the company’s dollar notes. Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in ﬁnancial loss to the company. The directors consider that the company is not exposed to any major concentrations of credit risk. At 31 December 2017, all bank deposits were held with banks with a Moody’s prime rating of P1. At the balance sheet date, no trade receivables were past their due dates, nor were any impaired; accordingly no bad debt provisions were required. The maximum credit risk exposures in respect of the company’s ﬁnancial assets at 31 December 2017 and 31 December 2016 equal the amounts reported under the corresponding balance sheet headings. A limited degree of interest rate risk is accepted. A substantial proportion of the company’s ﬁnancial instruments at 31 December 2017 carried interest at ﬁxed rates rather than ﬂoating rates. On the basis of the company’s analysis, it is estimated that a rise of one percentage point in interest rates applied to those ﬁnancial instruments which carry interest at ﬂoating rates would have resulted in an increase of $nil (2016: $nil) in the company’s interest revenues in its proﬁt and loss account. Non-derivative ﬁnancial instruments The following table details the contractual maturity of the company’s non-derivative ﬁnancial liabilities. The table has been drawn up based on the undiscounted amounts of the company’s ﬁnancial liabilities based on the earliest dates on which the company can be required to discharge those liabilities. The table includes liabilities for both principal and interest. Weighted Under Between Over 2 Total average 1 year 1 and 2 years interest rate years 2017 % $’000 $’000 $’000 $’000 US dollar notes - repayable 2022 8.5 1,803 1,803 28,542 32,148 Loan from REA Finance B.V. - repayable 2020 8.9 3,928 3,929 46,618 54,475 5,731 5,732 75,160 86,623 Weighted Under Between Over 2 Total average 1 year 1 and 2 years interest rate years 2016 % $’000 $’000 $’000 $’000 US dollar notes - repayable 2017 8.5 21,813 – – 21,813 US dollar notes - repayable 2022 8.5 901 1,803 30,344 33,048 Loan from REA Finance B.V. - repayable 2017 9.7 15,215 – – 15,215 Loan from REA Finance B.V. - repayable 2020 8.9 3,504 3,506 46,382 53,392 41,433 5,309 76,726 123,468 At 31 December 2016, the company’s non-derivative ﬁnancial assets (other than receivables) comprised cash and deposits of $724,000 (2016: $614,000) carrying a weighted average interest rate of nil per cent (2016: nil per cent) all having a maturity of under one year and loans (including Indonesian stone and coal interests) of $41,791,000 (2016: $39,028,000). O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c i a l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 119 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 120 Company ﬁnancial statements Notes to the company ﬁnancial statements (continued) (xiv) Reconciliation of operating loss to operating cash ﬂows 2017 2016 $’000 $’000 Operating loss 222 (225) Amortisation of dollar note issue expenses 111 266 Operating cash inflows before movements in working capital 333 41 Decrease / (increase) in receivables 20,233 (1,599) Increase in payables 2,037 3,474 Exchange translation differences (53) 103 Cash outflow from operations 22,550 2,019 Taxes paid (925) (982) Interest paid (7,750) (7,962) Net cash inflow / (outflow) from operating activities 13,875 (6,925) (xv) Pensions The company is the principal employer of the R.E.A. Pension Scheme (the “Scheme”) and a subsidiary company is a participating employer. The Scheme is a multi-employer contributory deﬁned beneﬁt scheme with assets held in a trustee-administered fund, which has participating employers outside the group. The Scheme is closed to new members. As the Scheme is a multi-employer scheme, in which the employers are unable to identify their respective shares of the underlying assets and liabilities (because there is no segregation of the assets), and does not prepare valuations on an IAS 19 basis, the company accounts for the Scheme as if it were a deﬁned contribution scheme. The company’s share of the total employer contribution is 5.4 per cent. A non-IAS 19 valuation of the Scheme was last prepared, using the attained age method, as at 31 December 2014. This method had been adopted in the previous valuation as at 31 December 2011 and in earlier valuations, as it was considered the appropriate method of calculating future service beneﬁts as the Scheme is closed to new members. At 31 December 2014 the Scheme had an overall marginal surplus of assets, when measured against the Scheme’s technical provisions, of £202,000 - $315,000. The technical provisions were calculated using assumptions of an investment return of 4.35 per cent pre-retirement and 2.80 per cent post-retirement and annual increases in pensionable salaries of 3.2 per cent. The basis for the inﬂationary revaluation of deferred pensions and increases to pensions in payment was changed from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) with effect from 1 January 2011 in line with the statutory change, except that the change does not apply to pension accrual from 1 January 2006, where the RPI still applies. The rates of increase in the RPI and the CPI were assumed to be 3.2 per cent and 2.45 per cent respectively. It was further assumed that both non-retired and retired members’ mortality would reﬂect S2PXA tables (light version) at 100 per cent and that non-retired members would take on retirement the maximum cash sums permitted from 1 January 2015. Had the Scheme been valued at 31 December 2014 using the projected unit method and the same assumptions, the overall result would have been similar. The Scheme has agreed a statement of funding principles with the principal employer and has also agreed a schedule of contributions with participating employers covering normal contributions which are payable at a rate calculated to cover future service beneﬁts under the Scheme. A discretionary contribution of £28,000 - $34,000 (2016: nil) was required to fund an inﬂation adjustment to pensions in payment relating to pre-1997 accrued entitlements which would not otherwise have been subject to full indexation. The Scheme had also agreed a recovery plan with participating employers which provided for recovery of the deﬁcit shown by the 31 December 2011 valuation through the payment of quarterly additional contributions over the period from 1 January 2013 to 30 September 2018. No contributions under that recovery plan were required in 2017 nor is any projected for 2018. There are no agreed allocations of any surplus on either the wind-up of the Scheme or on any participant’s withdrawal from the Scheme. The next actuarial valuation will be made as at 31 December 2017. The valuation will not be available until the second half of this year and is therefore not reﬂected in these ﬁnancial statements. 120 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 121 The company is responsible for contributions payable by other (non group) employers in the Scheme; such liability will only arise if other (non group) employers do not pay their contributions. There is no expectation of this and, therefore, no provision has been made. (xvi) Related party transactions 2017 2016 Loans to subsidiaries $’000 $’000 PT Cipta Davia Mandiri 5,028 14,561 PT KCC Resources Indonesia 12,422 12,622 Makassar Investments Limited 14,216 14,216 REA Finance B.V. – 3,008 PT REA Kaltim Plantations 73,191 70,531 R.E.A. Services Limited 26,468 24,086 131,325 139,024 2017 2016 Dividends received from subsidiaries $’000 $’000 R.E.A. Services Limited – 4,028 – 4,028 2017 2016 Interest received from subsidiaries $’000 $’000 PT Cipta Davia Mandiri 683 417 REA Finance B.V. 265 283 PT REA Kaltim Plantations 5,887 6,612 6,835 7,312 Remuneration of key management personnel The remuneration of the directors, who are the key management personnel of the group, is set out below in aggregate for each of the categories speciﬁed in IAS 24 “Related party disclosures”. Further information about the remuneration of, and fees paid in respect of services provided by, individual directors is provided in the audited part of the “Directors’ remuneration report”. 2017 2016 $’000 $’000 Short term benefits 1,364 1,405 Termination benefits 258 – 1,622 1,405 Other than the ex-gratia payment for loss of ofﬁce made in 2017 there is no remuneration other than short term beneﬁts. Loan from related party During the year, REA Trading Limited, a related party, made unsecured loans to the company on commercial terms. The maximum amount was $7.4 million, all of which had been repaid by 31 December. This disclosure also complies with the requirements of the Listing Rule 9.8.4. (xvii) Rates of exchange See note 39 to the consolidated ﬁnancial statements. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c i a l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 121 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 122 Company ﬁnancial statements Notes to the company ﬁnancial statements (continued) (xviii) Contingent liabilities and commitments Sterling notes The company has guaranteed the obligations for both principal and interest relating to the outstanding £31.9 million nominal 8.75 per cent guaranteed sterling notes 2020 issued by REA Finance B.V. The directors consider the risk of loss to the company from these guarantees to be remote. Bank borrowings The company has given, in the ordinary course of business, guarantees in support of subsidiary company borrowings from, and other contracts with, banks amounting in aggregate to $125 million (2016: $126 million). The directors consider the risk of loss to the company from these guarantees to be remote. Pension liability The company’s contingent liability for pension contributions is disclosed in note (xv) above. Operating leases The company has an annual commitment under an operating lease of $226,000 (2016: $199,000). The commitment expires after nine years (2016: after ten years). The lease does not contain any contingent rentals or an option to purchase the property. The future minimum lease payments under the operating lease are as follows: 2017 2016 $’000 $’000 Within one year 226 113 In the second to fifth year inclusive 906 797 After five years 906 996 2,038 1,906 (xix) Events after the reporting period There have been no material post balance sheet events that would require disclosure or adjustment to these ﬁnancial statements. 122 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 123 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c i a l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 123 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 124 Notice of annual general meeting This notice is important and requires your immediate attention. If make market purchases (within the meaning of section 693(4) you are in any doubt as to what action to take, you should of the Companies Act 2006) of any of its ordinary shares on consult your stockbroker, solicitor, accountant or other such terms and in such manner as the directors may from time appropriate independent professional adviser authorised under to time determine provided that: the Financial Services and Markets Act 2000 if you are resident in the United Kingdom or, if you are not so resident, another (a) the maximum number of ordinary shares which may be appropriately authorised independent adviser. If you have sold purchased is 5,000,000 ordinary shares; or otherwise transferred all your ordinary shares in R.E.A. Holdings plc, please forward this document and the (b) the minimum price (exclusive of expenses, if any) that accompanying form of proxy to the person through whom the may be paid for each ordinary share is £1.00; sale or transfer was effected, for transmission to the purchaser or transferee. (c) the maximum price (exclusive of expenses, if any) that may be paid for each ordinary share is an amount equal to Notice is hereby given that the ﬁfty-eighth annual general meeting of the higher of: (i) 105 per cent of the average of the R.E.A. Holdings plc will be held at the London ofﬁce of Ashurst LLP at middle market quotations for the ordinary shares in the Broadwalk House, 5 Appold Street, London EC2A 2HA on 13 June capital of the company as derived from the Daily Ofﬁcial 2018 at 10.00 am to consider and, if thought ﬁt, to pass the following List of the London Stock Exchange for the ﬁve business resolutions. Resolutions 12 and 13 will be proposed as special days immediately preceding the day on which such share resolutions, all other resolutions will be proposed as ordinary is contracted to be purchased and (ii) the higher of the resolutions. last independent trade and the current highest independent bid on the London Stock Exchange; and 1. To receive the company’s annual accounts for the ﬁnancial year ended 31 December 2017, together with the accompanying (d) unless previously renewed, revoked or varied, this statements and reports including the auditor’s report. authority shall expire at the conclusion of the annual 2. To approve the directors’ remuneration report for the ﬁnancial year ended 31 December 2017. 3. To approve the directors’ remuneration policy to take effect general meeting of the company to be held in 2019 (or, if earlier, on 30 June 2019) provided further that: immediately following the Annual General Meeting. (i) notwithstanding the provisions of paragraph (a) above, the maximum number of ordinary shares that may be bought 4. To re-elect as a director David Blackett, who having been a non- back and held in treasury at any one time is 400,000 executive director for more than nine years, retires as required by ordinary shares; and the UK Corporate Governance Code and submits himself for re-election. (ii) notwithstanding the provisions of paragraph (d) above, the company may, before this authority expires, make a 5. To re-elect as a director John Oakley, who, having become a contract to purchase ordinary shares that would or might non-executive director at the beginning of 2016 and having be executed wholly or partly after the expiry of this served for more than nine years as a director, retires as required authority, and may make purchases of ordinary shares by the UK Corporate Governance Code and submits himself for pursuant to it as if this authority had not expired. re-election. 6. To re-elect as a director Richard Robinow, who, having been a unconditionally authorised for the purposes of section 551 of non-executive director for more than nine years, retires as the Companies Act 2006 (the “Act”) to exercise all the powers of required by the UK Corporate Governance Code and submits the company to allot, and to grant rights to subscribe for or to 10. That the directors be and are hereby generally and himself for re-election. convert any security into, shares in the capital of the company (other than 9 per cent cumulative preference shares) up to an 7. To re-appoint Deloitte LLP, chartered accountants, as auditor of aggregate nominal amount (within the meaning of sub-sections the company to hold ofﬁce until the conclusion of the next (3) and (6) of section 551 of the Act) of £2,372,617; such annual general meeting of the company at which accounts are authorisation to expire at the conclusion of the next annual laid before the meeting. general meeting of the company (or, if earlier, on 30 June 2019), save that the company may before such expiry make any offer or 8. 9. To authorise the directors to ﬁx the remuneration of the auditor. agreement which would or might require shares to be allotted, or rights to be granted, after such expiry and the directors may allot That the company is generally and unconditionally authorised for shares, or grant rights to subscribe for or to convert any security the purposes of section 701 of the Companies Act 2006 to into shares, in pursuance of any such offer or agreement as if 124 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 125 the authorisations conferred hereby had not expired. 11. That the directors be and are hereby generally and (ii) otherwise than as speciﬁed at paragraph (i) of this unconditionally authorised for the purposes of section 551 of resolution, to the allotment of equity securities and the the Companies Act 2006 (the “Act”) to exercise all the powers of sale of treasury shares up to an aggregate nominal the company to allot, and to grant rights to subscribe for or to convert any security into, 9 per cent cumulative preference shares in the capital of the company (“preference shares”) up to amount (calculated, in the case of the grant of rights to subscribe for, or convert any security into, shares in the capital of the company, in accordance with sub-section an aggregate nominal amount (within the meaning of sub- (6) of section 551 of the Act) of £1,009,425 sections (3) and (6) of section 551 of the Act) of £13,000,000, such authorisation to expire at the conclusion of the next annual and shall expire at the conclusion of the next annual general general meeting of the company (or, if earlier, on 30 June 2019), meeting of the company (or, if earlier, on 30 June 2019), save save that the company may before such expiry make any offer or that the company may before such expiry make any offer or agreement which would or might require preference shares to be agreement which would or might require equity securities to be allotted or rights to be granted, after such expiry and the directors may allot preference shares, or grant rights to allotted, or treasury shares to be sold, after such expiry and the directors may allot equity securities or sell treasury shares, in subscribe for or to convert any security into preference shares, in pursuance of any such offer or agreement as if the power pursuance of any such offer or agreement as if the authorisations conferred hereby had not expired. conferred hereby had not expired. 13. That a general meeting of the company other than an annual 12. That the directors be and are hereby given power: general meeting may be called on not less than 14 clear days’ notice. (a) for the purposes of section 570 of the Companies Act 2006 (the “Act”) and subject to the passing of resolution 10 set out in the notice of the 2018 annual general meeting, to allot equity securities (as deﬁned in sub- By order of the board R.E.A. SERVICES LIMITED section (1) of section 560 of the Act) of the company for cash pursuant to the authorisation conferred by the said Secretary 26 April 2018 resolution 10; and Registered ofﬁce: First Floor 32 – 36 Great Portland Street London W1W 8QX Registered in England and Wales no: 00671099 (b) for the purposes of section 573 of the Act, to sell ordinary shares (as deﬁned in sub-section (1) of section 560 of the Act) in the capital of the company held by the company as treasury shares for cash. as if section 561 of the Act did not apply to the allotment or sale, provided that such powers shall be limited: (i) to the allotment of equity securities for cash in connection with a rights issue or open offer in favour of holders of ordinary shares and to the sale of treasury shares by way of an invitation made by way of rights to holders of ordinary shares, in each case in proportion (as nearly as practicable) to the respective numbers of ordinary shares held by them on the record date for participation in the rights issue, open offer or invitation (and holders of any other class of equity securities entitled to participate therein or, if the directors consider it necessary, as permitted by the rights of those securities) but subject in each case to such exclusions or other arrangements as the directors may consider necessary or appropriate to deal with fractional entitlements, treasury shares (other than treasury shares being sold), record dates or legal, regulatory or practical difﬁculties which may arise under the laws of any territory or the requirements of any regulatory body or stock exchange in any territory whatsoever; and O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2017 125 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 126 Notice of annual general meeting continued Notes In order for a proxy appointment or instruction regarding a proxy appointment made or given using the CREST service to be valid, the The sections of the accompanying Directors’ report entitled appropriate CREST message (a “CREST proxy instruction”) must be “Directors”, “Acquisition of the company’s own shares”, properly authenticated in accordance with the speciﬁcations of “Authorities to allot share capital”, “Authority to disapply pre- Euroclear UK and Ireland Limited (“Euroclear”) and must contain the emption rights”, “General meeting notice period” and “Recommendation” contain information regarding, and required information as described in the CREST Manual (available via www.euroclear.com/CREST). The CREST proxy instruction, regardless recommendations by the board of the company as to voting on, of whether it constitutes a proxy appointment or an instruction to resolutions 4 to 6 and 9 to 13 set out above in this notice of the amend a previous proxy appointment, must, in order to be valid be 2018 annual general meeting of the company (the “2018 Notice”). transmitted so as to be received by the company’s registrars (ID: RA10) by 10.00 am on 11 June 2018. For this purpose, the time of receipt The company speciﬁes that in order to have the right to attend and vote will be taken to be the time (as determined by the time stamp applied to at the annual general meeting (and also for the purpose of determining the message by the CREST applications host) from which the how many votes a person entitled to attend and vote may cast), a company’s registrars are able to retrieve the message by enquiry to person must be entered on the register of members of the company at CREST in the manner prescribed by CREST. The company may treat close of business on 11 June 2018 or, in the event of any adjournment, as invalid a CREST proxy instruction in the circumstances set out in at close of business on the date which is two days before the day of the Regulation 35(5) (a) of the Uncertiﬁcated Securities Regulations 2001. adjourned meeting. Changes to entries on the register of members after this time shall be disregarded in determining the rights of any CREST members and, where applicable, their CREST sponsors or person to attend or vote at the meeting. voting service provider(s) should note that Euroclear does not make available special procedures in CREST for particular messages. Normal Only holders of ordinary shares are entitled to attend and vote at the system timings and limitations will therefore apply in relation to the annual general meeting. A holder of ordinary shares may appoint input of CREST proxy instructions. It is the responsibility of the CREST another person as that holder’s proxy to exercise all or any of the member concerned to take (or, if the CREST member is a CREST holder’s rights to attend, speak and vote at the annual general meeting. A holder of ordinary shares may appoint more than one proxy in relation personal member or sponsored member or has appointed (a) voting service provider(s), to procure that such member’s CREST sponsor or to the meeting provided that each proxy is appointed to exercise the voting service provider(s) take(s)) such action as shall be necessary to rights attached to (a) different share(s) held by the holder. A proxy ensure that a message is transmitted by means of the CREST system need not be a member of the company. A form of proxy for the meeting by any particular time. In this connection, CREST members and, where accompanies this notice. To be valid, forms of proxy and other written applicable, their CREST sponsors or voting service provider(s) are instruments appointing a proxy must be received by post or by hand referred, in particular, to those sections of the CREST Manual (during normal business hours only) by the company’s registrars, Link concerning practical limitations of the CREST system and timings. Asset Services, PXS, 34 Beckenham Road, Beckenham BR3 4TU by no later than 10.00 am on 11 June 2018. The rights of members in relation to the appointment of proxies described above do not apply to persons nominated under section 146 Alternatively, appointment of a proxy may be submitted electronically by of the Companies Act 2006 to enjoy information rights (“nominated using either Link’s share portal at www.signalshares.com (and so that persons”) but a nominated person may have a right, under an the appointment is received by the service by no later than 10.00 am on agreement with the member by whom such person was nominated, to 11 June 2018) or the CREST electronic proxy appointment service as be appointed (or to have someone else appointed) as a proxy for the described below. Shareholders who have not already registered for annual general meeting. If a nominated person has no such right or Link’s share portal may do so by registering as a new user at does not wish to exercise it, such person may have a right, under such www.signalshares.com and giving the investor code shown on the an agreement, to give instructions to the member as to the exercise of accompanying proxy form (as also shown on their share certiﬁcate). voting rights. Completion of a form of proxy, or other written instrument appointing a proxy, or any appointment of a proxy submitted electronically, will not Any corporation which is a member can appoint one or more corporate preclude a holder of ordinary shares from attending and voting in representatives who may exercise on its behalf all of its powers as a person at the annual general meeting if such holder wishes to do so. member provided that they do not do so in relation to the same shares. CREST members may register the appointment of a proxy or proxies for Any member attending the annual general meeting has the right to ask the annual general meeting and any adjournment(s) thereof through questions. The company must cause to be answered any such question the CREST electronic proxy appointment service by using the procedures described in the CREST Manual (available via relating to the business being dealt with at the meeting but no such answer need be given if (a) to do so would interfere unduly with the www.euroclear.com/CREST) subject to the company’s articles of preparation for the meeting or involve the disclosure of conﬁdential association. CREST personal members or other CREST sponsored information, (b) the answer has already been given on a website in the members, and those CREST members who have appointed (a) voting form of an answer to a question, or (c) it is undesirable in the interests service provider(s), should refer to their CREST sponsor or voting of the company or the good order of the meeting that the question be service provider(s), who will be able to take the appropriate action on answered. their behalf. 126 R.E.A. Holdings plc Annual Report and Accounts 2017 249315 REA Holdings p68-end.qxp 27/04/2018 13:03 Page 127 Copies of the executive director’s service agreement and letters setting reason of inconsistency with any enactment or the company’s out the terms and conditions of appointment of non-executive directors constitution or otherwise), (b) it is defamatory of any person, or (c) it is are available for inspection at the company's registered ofﬁce during frivolous or vexatious. Such a request may be in hard copy form or normal business hours from the date of this 2018 Notice until the close electronic form, must identify the resolution of which notice is to be of the annual general meeting (Saturdays, Sundays and public holidays given or the matter to be included in the business, must be authorised excepted) and will be available for inspection at the place of the annual by the person or persons making it, must be received by the company general meeting for at least 15 minutes prior to and during the meeting. not later than the date 6 clear weeks before the meeting, and (in the A copy of this 2018 Notice, and other information required by section accompanied by a statement setting out the grounds for the request. case of a matter to be included in the business only) must be 311A of the Companies Act 2006, may be found on the company's website www.rea.co.uk. Under section 527 of the Companies Act 2006, members meeting the threshold requirements set out in that section have the right to require the company to publish on a website (in accordance with section 528 of the Companies Act 2006) a statement setting out any matter that the members propose to raise at the relevant annual general meeting relating to (i) the audit of the company's annual accounts that are to be laid before the annual general meeting (including the auditor’s report and the conduct of the audit); or (ii) any circumstance connected with an auditor of the company having ceased to hold ofﬁce since the last annual general meeting of the company. The company may not require the members requesting any such website publication to pay its expenses in complying with section 527 or section 528 of the Companies Act 2006. Where the company is required to place a statement on a website under section 527 of the Companies Act 2006, it must forward the statement to the company's auditor by not later than the time when it makes the statement available on the website. The business which may be dealt with at the annual general meeting includes any statement that the company has been required under section 527 of the Companies Act 2006 to publish on a website. As at the date of this 2018 Notice, the issued share capital of the company comprises 40,509,529 ordinary shares, of which 132,500 are held as treasury shares, and 72,000,000 9 per cent cumulative preference shares. Only holders of ordinary shares (and their proxies) are entitled to attend and vote at the annual general meeting. Accordingly, the voting rights attaching to shares of the company exercisable in respect of each of the resolutions to be proposed at the annual general meeting total 40,377,029 as at the date of this 2018 Notice. Shareholders may not use any electronic address (within the meaning of sub-section 4 of section 333 of the Companies Act 2006) provided in this 2018 Notice (or any other related document including the form of proxy) to communicate with the company for any purposes other than those expressly stated. Under section 338 and section 338A of the Companies Act 2006, members meeting the threshold requirements in those sections have the right to require the company (i) to give, to members of the company entitled to receive notice of the annual general meeting, notice of a resolution which may properly be moved and is intended to be moved at the meeting and/or (ii) to include in the business to be dealt with at the meeting any matter (other than a proposed resolution) which may be properly included in the business. A resolution may properly be moved or a matter may properly be included in the business unless (a) (in the case of a resolution only) it would, if passed, be ineffective (whether by R.E.A. Holdings plc Annual Report and Accounts 2017 127 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M 249315 REA Holdings Cover Spreads.qxp 27/04/2018 12:55 Page 2 R.E.A. Holdings plc (“REA”) is a UK company of which the shares are admitted to the Ofﬁcial List and to trading on the main market of the London Stock Exchange. The REA group is principally engaged in the cultivation of oil palms in the province of East Kalimantan in Indonesia and in the production and sale of crude palm oil and crude palm kernel oil. Sterilising cages Steam turbine This report has been managed by Perivan Financial Limited. (249315) Using an environmental management system that complies with ISO 14001. With the internationally recognised ISO 14001 certification since 2007 and are also FSC certified. The report was produced on a press using the very latest LED UV drying technology with UV inks that consume less energy in the printing process, eliminating the need for traditional drying systems, and are free from volatile organic compounds (VOC’s). Approximately 99 per cent of any waste associated with this production will be recycled. The report is printed on Galerie satin paper which is manufactured at an EMAS accredited mill and is FSC accredited, meaning that it is sourced from managed forests. The booklet is a certified CarbonNeutral® publication. All emissions associated with the manufacture of the paper, printing and finishing processes have been offset to net zero. Through Natural Capital Partners, offsetting these emissions by supporting global emission reduction projects that support low carbon sustainable development. 249315 REA Holdings Cover Spreads.qxp 27/04/2018 12:55 Page 1 R.E.A. HOLDINGS PLC R.E.A. HOLDINGS PLC . R E A . . l i H o d n g s p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 7 Annual Report and Accounts 2017 R.E.A. Holdings plc First Floor 32-36 Great Portland Street London W1W 8QX www.rea.co.uk Registered number 00671099 (England and Wales)

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