Delfi Limited

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Dear Fellow Shareholders,

2006 was a stellar year for the Petra Foods Group where we achieved significant milestones in further growing our Cocoa Ingredients and Branded Consumer businesses while delivering a strong financial performance

For the Financial Year ended 31st December 2006, the Group performed exceptionally well with revenues increasing 19% year on year (YoY) to US$522.9 million as demand for the products of the Cocoa Ingredients and Branded Consumer divisions remained strong. This is a significant milestone in the Group's history as it is the first time that the US$500 million revenue mark has been surpassed.

At the pre-tax profit level, the Group reported an even stronger performance growth of 24.6% to US$37.3 million. The key drivers behind this were the strong EBITDA performance of 24.8% and a one-time exceptional pre-tax gain of US$2.6 million.

The Group's 2006 EBITDA of US$54.4 million represented a YoY increase of US$10.8 million of which US$8.3 million was contributed by the Branded Consumer division and US$2.5 million by the Cocoa Ingredients division. The performance of Branded Consumer outpaced that of Cocoa Ingredients: a YoY growth of 45.8% vs. the latter's 9.7%.

This strong performance had been achieved despite the Group's interest cost rising by US$3.7 million (an increase of 74.2% YoY) to US$8.6 million. The interest cost increased as a result of the higher levels of debt to fund capital expenditure and working capital coupled with a higher interest rate environment. Notwithstanding the higher finance cost, the Group generated a healthy 5 times interest cover.

At the net profit level, the Group reported an even stronger growth of 25.3% YoY to US$29.1 million, or 5.47 US cents per share. The strong growth was driven mainly by the strong demand for our products in both divisions.

The exceptional item of US$1.8 million (net of taxation) can be attributed to the negative goodwill arising after the Group's acquisition of the Goya businesses in the Philippines. This was, however, offset by a charge for the redeployment of manufacturing equipment from the Malaysian chocolate manufacturing operations to the Group's manufacturing hubs in Indonesia and the Philippines.

Group Cash Flow

Net cashflow from operating activities before working capital changes amounted to US$45.1 million, compared to US$45.3 million in the previous year.

Notwithstanding the higher working capital requirements arising from our expansion program, the Group still generated a healthy net cashflow from operating activities of US$29.5 million which was more than sufficient to pay the US$10.6 million dividend to our shareholders and fund a major portion of the capital expenditure in 2006.

In terms of capital expenditure, the Group invested a total of US$30.1 million in 2006 to fund the expansion of both our divisions. For the Cocoa Ingredients division, a total of US$17.1 million was invested, mainly to increase the production capacity of the cocoa processing facilities in Malaysia and Brazil. The Group also invested approximately US$13 million to expand the production capacity and capabilities of our manufacturing plant in Bandung, Indonesia to support the increase in domestic and overseas demand for our chocolate and confectionery products.

To further strengthen and enhance our capabilities in view of our strong growth momentum, we anticipate making additional capital expenditure in 2007 to support this growth. However, we estimate that the Group's 2007 capital expenditure is likely to be lower than the previous year's. This capital expenditure will be used to expand our cocoa processing and chocolate confectionery capacities for selected product categories; to improve our manufacturing processes and efficiency; and to increase our warehousing and distribution capabilities. Our expansion program is expected to be funded using our existing and future cash flows and bank borrowings.

Balance Sheet

By the end of 2006 total equity had increased by US$19.8 million to US$171.9 million. Total assets grew by US$81.9 million of which US$30.1 million can be attributed to the Group's capital expenditure program, US$8.9 million from the acquisition of the new brands and businesses and the remainder from higher working capital.

The Group's inventory level as at 31st December 2006 had increased by US$18.1 million YoY to US$111.9 million due to significantly expanded operations for both the divisions, either as a result of organic growth or, in the case of the Branded Consumer division, a combination of organic growth (i.e. the doubling of the manufacturing capacity at our Indonesian production facility) and acquisition (i.e. the Goya business in the Philippines).

Despite this increase in inventory level, the Group's average inventory days for 2006 was 90 days compared to 100 days in 2005. During the course of 2006, we continued to work tirelessly with our cocoa bean suppliers in managing our supply chain effectively.

For the same period, the Group's trade receivables increased by US$17.7 million to US$62.8 million. This increase can be attributed to the expanded operations of the Branded Consumer division.

In line with the businesses' growth and expansion, total borrowings as at 31st December 2006 were US$124.9 million compared to US$87.8 million at 31st December 2005. The increase came mainly from long term bank borrowings and finance leases for capital expenditure; trade finance facilities; and short term bank loans and overdrafts which were used to fund higher levels of inventory and receivables attributed to the enlarged business and recent capacity expansion.

Capital Management

With the strong cash flow generated by the Group and the proceeds from our IPO in 2004, our net debt to equity ratio has declined over the past four years to 0.67 times in 2006. Although higher than the 0.54 times in 2005, this is a significant improvement from the 1.86 times in 2003.

As part of the Group's financial strategy, we actively manage the funding needs of the business and balance it against the Group's respective funding cost, foreign exchange exposure and the liquidity needs of the business. With our strong credit profile and well-perceived business standing, Petra Foods has been able to take certain initiatives that have given the Group more flexibility in arranging the financing required for our expansion and this has led to a relatively lower cost of borrowing. During 2006 we have:

  • shifted progressively from secured/structured borrowings to unsecured financing so as to gain greater financing flexibility;
  • driven down credit spreads to reduce effective interest costs;
  • broadened our financing options to include the debt capital market; and
  • extended our debt maturity profile so as to reduce our exposure to the risks inherent in frequent refinancing of our borrowing needs.

In December 2006, we launched a Singapore dollar denominated S$300 million Multicurrency Medium Term Note (MTN) Program. With this instrument, we have the flexibility to tap the capital market in different tranche sizes, tenors, currencies and timings to fund our future growth. This gives us a a wider source of funding in the debt capital markets and enables us to optimise our interest rate structure.

Since the launch of the MTN Program, we have drawn down S$60 million and have a remainder of S$240 million for future business expansion needs. We believe that with this MTN Program, our Group's balance sheet and cash flow position will be further strengthened from the general extension of our debt maturity profile, thereby mitigating our exposure to frequent refinancing risk.

As at 31st December, 2006, the Group's total available credit facilities amounted to US$502 million. However the Group's total borrowing was only US$124.9 million, implying that only 25 per cent of the total available facilities were utilized, thereby providing us with ample headroom to draw on the available facilities for future funding and expansion requirements.

Corporate life after FRS 39

The implementation of FRS 39 requires all derivative exposures entered into by the Group to be fair valued and recognized as either a Fair Value or Cash Flow Hedge. Under a Fair Value Hedge, both the cocoa bean inventory and the derivatives entered into by the Group are re-measured at fair value with the gains or losses recognized in the income statement in the period of reporting. If an instrument qualifies as a Cash Flow Hedge, changes in the value of the cocoa bean futures entered can be temporarily accumulated in a reserve in the Balance Sheet and then transferred to the Income Statement in the period when the economic value of the hedged item impacts the profit or loss of the Group.

Due to timing differences between the recognition of the hedge transactions in the Balance Sheet versus those recognized immediately in the Income Statement, there is a net impact of US$2.1 million which is reflected as a fair value gain in the Income Statement while the Cash Flow Hedge Reserve in the balance sheet reflects a loss of US$526,000. The breakdown of these amounts is as follows:

Shareholders' Returns

We are committed to improving shareholders‘ returns. We have generated a Return on Equity of 18% in 2006, an improvement of 1.5 percentage points compared to the previous year.

Furthermore, in line with the growth experienced during the year, the healthy cash flows of the group and our robust balance sheet position your Board of Directors has recommended a final dividend payment of US$5.5 million or 1.03 US cents per share. This is subject to the approval by shareholders at the forthcoming Annual General Meeting on 20th April 2007. If approved, the total dividends for the full year will total US$10.9 million or 2.04 US cents per share.

Chin Koon Yew
Chief Financial Officer
15th March, 2007