Board of Directors' Report

The Company is committed to continuously improve each employee’s productivity through automation and mechanization program implemented throughout all lines. In addition, human resource development has also been implemented consistently through a series of technical training programs aimed to ensure proper implementation of the Company’s business processes.

Dear Shareholders,

Throughout 2015 the oil palm plantation sector faced number of challenges. Price fluctuation as an uncontrollable factor, is one of the risks inherent to the commodity sector. On average global Crude Palm Oil (CPO) price plummeted by 24.2% from USD 821 per MT in 2014 to USD 622 per MT. The weakening of CPO prices, in conjunction with the decline of several other commodity prices such as crude oil, coal and other vegetable oils was the impact of the weakening in global economic growth. During the same period, the Company’s average CPO sales price decreased by 15.8% from Rp 8,282 per kilogram to Rp 6,971 per kilogram. Meanwhile, the average sales price of kernels decreased by 13.8% from Rp 5,095 per kilogram to Rp 4,393 per kilogram.

Throughout 2015 the Company’s Fresh Fruit Bunch (FFB) production reached 5.60 million tons, in which consist of nucleus production as much as 4.20 million tons and plasma plantation for the amount of 1.40 million tons. The total production result is representing an increase of 0.7% compared to the same period during the previous year of 5.56 million tons, which was foremost supported by a production increase in Sulawesi. The increase in FFB production amidst a rather dry season in 2015, is an indication that the intensification program implemented by the Company during the past few years is running according to plan. At the same time, purchases of external fruit from third parties increased by 2.0% to 2.45 million tons. These two factors contributed to maintaining CPO production of 1.74 million tons in 2015.

The decline in CPO and kernel prices affected the Company’s financial aspect, in that the Company recorded a net revenue of Rp 13.06 trillion in 2015 or a decrease of 19.9% compared to the revenue over the previous period. Apart from the decline in CPO prices, higher financial expenses and increasing of currency exchange losses due to the rising amount of company loans, became the main factor that impact to the Company’s net profits which declined by 75.3% to Rp 619 billion.

Development of Palm Oil Downstream Industry

The Company has entered the palm oil downstream industry, marked by the operation of refinery in Mamuju Utara Regency, West Sulawesi in early 2014. The refinery which manufactures CPO derivative products such as RBDPO, Olein, Stearin and PFAD is designated to serve the export market, among others to China, India, Philippines and South Korea. In 2015, Olein sales reached 412.21 thousand tons or an increase of 61.6% from the sales in 2014 of 255.07 thousand tons. In the early of 2015, the Company acquired an equity share of 50% in a refinery owned by KL-Kepong Plantation Holdings Sdn, Bhd. This refinery, located in Dumai, Riau Province, has a daily processing capacity of 2,000 tons of CPO. With the ownership of these two refineries, the Company’s effective refining capacity reached 3,000 ton of CPO a day or equal to 900,000 ton of CPO a year.

Human Resources Management

As a labor intensive industry, we are aware that good human resources management is the key to success in facing the increasing competition. At the end of 2015, the Company’s number of permanent employees reached 36,214 people. The Company is committed to continuously improve each employee’s productivity through an automation and mechanization program implemented throughout all lines. In addition, human resource development has also been implemented consistently through a series of technical training programs aimed to ensure proper implementation of the Company’s business processes. Leadership training is also provided to the Company’s best cadres, who, in the future, will take over the Company leadership to ensure the sustainability of the Company.

Good Corporate Governance

The Company continuously practices the principles of Good Corporate Governance (GCG) in it business operations in order to ensure that Company operational standards are implemented in accordance with prevailing laws and regulations and meet the business ethics aspects to protect the interests of all stakeholders.

Through the Audit Committee, which is responsible for carrying out its supervisory function, it is ensured that corporate governance is implemented properly based on principles of Transparency and Accountability throughout every stage of business processes.

Sustainability Aspects and ISPO

The Company is highly committed to consistently implement a sustainable oil palm plantation with ISPO (Indonesian Sustainable Palm Oil) certification as a Government mandatory program for all oil palm plantations operating in Indonesia, through Government Regulation No. 11 of 2015 on the Certification System of Sustainable Palm Oil. By the end of 2015, the Company has obtained 16 ISPO certificates, 14 others were in the process of obtaining certification and 4 others were undergoing an audit process.

Corporate Social Responsibility (CSR)

The Corporate Social Responsibility (CSR) program is the basis of the Company’s contribution in social care through four pillar programs, which are: economic empowerment for the communities, education, health care and environmental preservation.

On the economic empowerment aspect, the Company has entered a partnership with the community through a plasma program and Income Generating Activities program which supports the improvement of the community welfare through a series of partnership program.

In the area of education, the Company has been managing 36 Kindergartens, 13 Elementary Schools and 8 Junior High Schools. In addition the Company also supports the management of a number of state schools in the surroundings of the Company’s plantations.

In the area of health care, the Company ensures that facilities and provision of health services for all employees and the communities living in the surroundings of the operational areas of the plantations are taken care of properly. The Company also supports efforts to improve the health of the communities in the surroundings of the plantations through various programs and activities for the health of mothers and children by managing 357 Maternal Health Centers (Posyandu) within the plantation and 433 Public Maternal Health Centers (Posyandu) in the surrounding villages, with total of 3,734 Posyandu cadres.

On the aspect of proper environmental management, the Company ensures good environmental governance which is reflected in the Green PROPER rating awarded to 11 Company’s plantations and Blue PROPER rating to 15 of its plantations.

Research and Development (R&D)

Activities in R&D focused on three aspects namely, creating superior seeds to achieve optimum yield, isolating bacteria to improve the resilience of plants against pests and diseases and developing tissue cultures. Implementation of good R&D will contribute to the success of the Company’s intensification program.

Prospects and Plans for 2016

In facing the business challenges of the coming year the Company has announced a number of policies and measures to strengthen the Company capabilities by focusing on the palm oil upstream and downstream sectors, namely:

1. Continue the intensification, mechanization and automation programs in order to improve the Company productivity and efficiency. These programs will support the Company’s efforts to become the cost leader in the palm oil industry.
2. Strengthen Research & Development (R&D) to produce superior seeds that will support improvement in plant productivity. These efforts are expected to become the future Company core competence.
3. Implement a replanting program to secure future high production levels.
4. Further development of downstream sector in the palm oil industry.
5. Continuously develop the quality of human resources through training programs.
6. Continue the corporate social responsibility activities to maintain a harmonious relationship with the communities and people in the surrounding areas.

These are the outlines of the Company Annual Report for 2015. On behalf of the Board of Directors we wish to express our thanks to the shareholders and all employees who have made it possible for us to successfully overcome these challenging times. We are optimistic that the palm oil sector remains very prospective. However, the competitive challenges in the vegetable oil market, combined with demands for a more environment-friendly management, demands hard work at all levels of the Company in order to maintain the Company’s oil palm plantations at their position as a role model in the industry.

On behalf of the Board of Directors

PT Astra Agro Lestari Tbk

Widya Wiryawan

President Director