Agthia Group PJSC (AGTHIA) Earnings Call Transcript & Summary

Hello, everyone. My name is Nada Amin. I'm part of EFG Hermes' consumer and retail team. It's our pleasure to be hosting Agthia's First Quarter 2020 Results Conference Call. The management will begin with the presentation, and then we'll open the floor to Q&A. I'll hand over the line to Ms. Sahar Srour. Please go ahead.

Thank you, Nada. Good afternoon, ladies and gentlemen. Thank you for joining us today in Agthia Group's earnings conference call for the first quarter of 2020 hosted by Jamal Al Dhaheri, acting CEO; and Ammar Al Ghoul, CFO. Jamal will first talk about the performance highlights during the quarter, after which Ammar will cover the financial results. We will then continue with the Q&A session. For your reference, the relevant presentation is available in the Investors section of the company's website. Please note that this call may contain forward-looking statements, which should be considered in conjunction with the disclaimer included in this presentation. Over to you, Jamal.

Jamal, your line is open.

Okay. So good afternoon, everyone. This is Jamal Al Dhaheri, acting CEO of Agthia. We have commenced 2020 embracing sustainability in February during Gulfood as we have revealed the region's first plant-based bottled water, which is called Al Ain Plant Bottle and initiated an endeavor for the PET collection and recycling in a partnership with Veolia. In March, we were set in front of unprecedented circumstances as we face a global pandemic with the COVID-19 outbreak. At Agthia, we have proven our commitment to healthier living by sticking to our core values. As a critical player in the nation's food security, we are collaborating with the government in ensuring continuous supply and increasing security stock of essential food, water and beverage products to better serve the community. Demonstrating our agile business model, we launched an online application embracing all our product range, expanding our e-commerce footprint and activated home delivery service. Our determination in overcoming headwinds additionally endorsed by our flexible supply chain and robust sales force, contributing to our top line growth and preserving market leadership across core categories. In all this, we continue to prioritize our responsibility toward preserving healthy and safety for our employees and consumers. In the first quarter of 2020, group revenue stood at AED 571 million. This implies a 12% growth year-on-year, largely driven by our flour, food and 5-gallon water segment. Group net profit came in at AED 27 million. Moving on the following slide, let us look at the bottled water market and key players in the UAE retail environment. The first 2 chart depict the volume and value shares of major players for the last 12 months ending February 2020 versus 2019. Agthia portfolio, Al Ain Water, Alpin and Al Bayan, sustained leadership in both volume and value share at respective 29% and 26.4%. Our flagship brand, Al Ain Water, defended #1 ranking in the UAE despite an aggressive competitive landscape. As a testament to our continuous efforts amidst a shrinking overall category, we succeeded in systematically growing our market share on a monthly basis since October 2019, as shown in the chart at the bottom of the slide. Let us check our sold water volume across board. Our 5-gallon water business in the UAE recorded strong growth as we continue to expand our customer base, specifically in home and Northern Emirates, which more than offset lost sale in corporate post closure of most offices and schools in the last month of the quarter. During the same period, we sold over 18 million cases of bottled water across the UAE, Saudi Arabia, Turkey and Kuwait. In the UAE, the uplift in sold volumes largely came in as a result of consumer stockpiling in March in response to COVID-19 outbreak. Our international markets recorded mixed results, wherein the outperform of -- outperformance of our Kuwait and Turkish operation was offset by the drop in Saudi Arabia sales, with the latter reflecting our effort to improve the quality of credit sales and the cancellation of Umrah activities that normally start prior to the month of Ramadan. Under the consumer business, food segment is now inevitably a positive contributor to our P&L. Food segment net revenue increased by 21%, driven by trading items and tomato paste/frozen vegetable in both UAE and Egypt as the consumers responded to COVID-19. Trading items, which now constitute 53% of food revenue, recorded 19% year-on-year growth in its top line, as we quickly responded to current challenges to better serve the community via opening 2 new branches, adding new SKUs and activating home delivery orders and drive-through facility. The tomato paste and frozen vegetable revenues from UAE and Egypt grew by 39% versus last year as we expanded to catering channel and accommodated for consumer stockpiling in March. Meanwhile, dairy sales were largely impacted by closure of eateries and bakery sales on the cancellation of ADNOC Flex scheme. Finally, on the agri-business, flour segment posted significant top line growth of 52% versus last year, driven by strong domestic demand, escalation in export sales, including another -- including an order to the World Food Program, WFP, and higher wheat trading. Additional milestones in the flour segments are maintaining #1 leading position for retail flour and improving overall segment profit margin versus last year. Similarly, animal feed recorded enhanced profitability on favorable channel mix despite lower segment sale on lower grain sales and reduced demand from small-sized farms. I would like now to pass the line over to Mr. Ammar, our CFO, for the financial review. Thank you very much.

Thank you, Jamal. Hello. This is Ammar. Thank you for joining Agthia investors conference. Starting with the revenue. The group revenues grew by 12% year-on-year, reaching AED 571 million in Q1 2020. Net revenue contribution by consumer business reached 52%, whereas agri-business generated the remaining 48%. Consumer business revenue reached AED 298 million, implying a 6% year-on-year growth, largely driven by 21% year-on-year growth in the food segment revenue of AED 82 million. Water and beverage segment posted AED 216 million top line, as higher sales from Kuwait operations and the 5-gallon water business largely offset the slip in bottled water sales in UAE and Saudi Arabia. Agri-business revenue recorded AED 273 million and grew by 21% year-on-year on higher flour sales as previously elaborated by Jamal. Moving to the next slide on the group gross profit margin. Current quarter gross profit margin came in at 29.9% versus 31.4% in Q1 2019. Drop in margin is largely attributed to lower bottled water pricing in both domestic and international operations, coupled with lower beverage volume sales due to excise tax and pressure on the foodservice channel. While the prices of the bottled waters are suffering from price erosion, Al Bayan, in the meantime, is still marginally able to cope with the same and slower pace due to a better deal-making with major customers. Next, we will talk about net profit. The group net profit prevailed at AED 27 million, excluding the bad debt provision provided for this year and the tax credit recorded in Turkey last year. Shortfall in net profit for the period is largely a boost as -- or due to better agri-business profitability and cost optimization countered the impact of the de-growth in the bottled water category in UAE. This is further explained in the next slide where we are showing 2 waterfalls that explain top line and bottom line reconciliation between last year and the current year, or this year. Starting with revenues. AED 39 million related to World Food Program flour order, plus AED 6 million higher grain trading, have more than offset a AED 10 million lost revenue against lower bottled water pricing in UAE and lower volumes in beverage segment and KSA operations. Robust growth momentum across our flour and food segments, Kuwait operations and the 5-gallon water business resulted in additional organic growth, taking our net revenue to AED 571 million. In addition to the resulting impact of the above items on profit, we highlighted 3 more factors. We recorded AED 9 million of cost savings, which marginally offset one-off AED 5 million tax incentive from our Turkey subsidiary recorded last year, and this year's bad debt provision against longer collection days in the international markets, mainly. With this, we conclude today's prepared remarks, and the floor is now open for questions and answers, and thank you so much.

[Operator Instructions] Our first question comes from Nishit Lakhotia.

I have mainly a question on the water and business -- water and beverages business in -- among your segments. The profitability has been extremely low. I mean it's around AED 1 to AED 2 million that you're making at net profit level. And even if I add back the AED 7 million, AED 8 million bad debt provision that you've done, even then, the profit -- profitability of the segment is just 30%, 35% of what it was last year. On an average Agthia used to make AED 25 million to AED 30 million profit from this segment. So I'm just a bit concerned because the macro environment is just getting difficult. And next quarter, there won't be -- I mean even Hajj is not going to be there this year, given the situation, so -- in Saudi Arabia. And I'm not sure whether your bad debts and ECL provisioning will go down or it will just be at these levels. So wanted to know more as to what's your outlook on the profitability of your water business? And also, if I look at the one-offs in this quarter, I mean you had one gain, one AED 35 million -- AED 39 million sales from your flour business to World Food Program. So you must have made at least AED 5 million, AED 6 million there. So if you remove that one-off gain, then you are at AED 20 million on a recurring basis for a quarterly profit. So is there any risk to dividends if this kind of quarterly profit is maintained because you have a very healthy cash balance? So anything on that front also will be very helpful.

Jamal, do you want me to answer on this one?

Yes, yes, Ammar. Please go ahead.

Okay. Thank you for the question. It's actually 3 or 4 questions. So I took notes, as much as I remember, I will answer and please remind me if I miss anything. Let's first talk about the profitability effect. I agree with you on the profitability side, the -- this is mainly due to the changes in the portfolio mix, mainly given the surrounding circumstances. Like for example, highly profitable segments are not contributing to our revenue like before the pandemic situation where we are currently at. And a good example is basically the hotels, restaurants, schools and food services sector. While other bottled water sectors have more sales, but with less profitable items. Now looking into the future, I don't know, I can't imagine when this pandemic will slow down. However, what I can share with you and with everybody on the call, that Agthia is progressing very well in terms of maintaining and defending its market share. And the market share will be a very good element that will determine future success in the water industry. So until now, with Agthia being able to defend its market share and leadership position, I think that the outlook will be better than in case of losing any of such market share. You asked me another question about the order to the Work Food Program. I wouldn't really call it one-off, though we wanted to mention this one. The profit generated from this order was around AED 4.5 million and the revenues were AED 39 million. I don't see this order never coming again, but there is less probability. Now when it comes to the holy season in Saudi Arabia, the Hajj and Umrah, this is an overall negative impact on the entire economy of the region and for any business, with the direct operation with Saudi Arabia. This is not only going to affect water and FMCG, it will also affect airlines, transportation, logistics, services like hotels and a lot of other sectors. Now this has already affected us, and it is among the contributors to the slowdown in the collectability. The accounting terminology, bad debt, is a bit aggressive for the current situation. We are providing, actually, a recognition to Agthia. We are providing slow-moving receivables provision in recognition to Agthia's conservative provisioning policy as well as IFRS 9. So what's coming in the future, I think towards the end of Q1, we will have more visibility, and we will be in a better position to assess the adequacy of the provisions we did provide last year back in 2019 and what we have provided for in Q1.

Okay, so just to follow up on the first...

Nishit, I hope I covered as much as...

Yes, you did. But just following up on that first question. I mean if I look at your gross profit in the water and beverages segment year-on-year, your gross profit is like AED 5 million less than what you made last year in 1Q '19, say, from AED 102 million to AED 97 million. But your bottom line is AED 25 million less. So I understand AED 7 million, AED 8 million is coming from the bad debts. But what is -- what exactly is, is the other part of the difference that you are looking at, at the bottom line level below gross? And what strategy do you have to push the profitability of this segment up? Because unless this segment recovers, overall Agthia will not be able to make any meaningful -- the profits. It will be around AED 25 million or AED 20 million per quarter. So I want to understand what strategy you have to even to push the profitability, in the end I understand the market share gain, but in terms of profitability, what would happen? And what is the reason for the sharp drop in profitability? Even if I understand the bad debt part of the Saudi business and the AED 7 million, AED 8 million you've done there, the math does not add up.

The answer is on -- the answer for all the questions is one line item, which is basically the logistics and additional distribution expenses we incurred, particularly during the month of March, to play our essential role as a food security company. Cost of delivery due to the increase in volume sales, that was the main contributor to the increase in sales and distribution expenses. Now with the things with the pandemic situation slowing down going forward, I believe this kind of expenses will go down gradually during Q2 onwards. As far as the...

I want to...

Short term, short -- sorry.

I just want to add one more comment. And also on the GP level, I mean it's worth mentioning that one of our important sectors was impacted, which is the Horeca sector. And that is considered to be one of the good profitable segments that we have. So we need to keep this in mind as well.

Okay.

And if I may add also the competition is very tough. There's a lot of promotion happening around us. And for us to maintain that market share we had to balance it a little bit. But at the same time, what make us very comfortable is that if we compare our margin compared to our competitors, we are better in that sense. So we are not discounting it below the -- our competitors, which -- I mean we are trying to balance as best as we can. So it is between margin and the market share.

Our next question comes from Divye Arora.

So the -- can you give us some highlight on the price erosion part? How much price has fallen in general? So there used to be a slide which used to -- which you guys would present before, which is to show how the prices have been moving up and down, the prices form, basically, in the market. And so if you can just throw some color on that. And the other one is regarding the competition. So we have seen this competition has been there for the last 2, 3 years now, and it has been putting pressure on your margins continuously. The margins are going down in the water business, and this was the worst quarter, I would say. As the previous gentleman pointed out, the profitability was the lowest level. The -- so what is the outlook basically over here? The competition would continue for, let's say, for a year. Do you think that there are a few competitors who can give up, ultimately, and it can lead to some industry consolidation? Or do you see this continuing for next 2, 3 years and the prices further declining? We're going to have a weak economy this year. We are seeing job losses in different sectors. In general, F&B is going to be weak. So what do you think, can this lead to some sort of a consolidation? Are you looking out -- are you trying to acquire someone? Or some of your biggest competitors are trying to merge with you? Or is there anything in the market? That's on the UAE side. On the VAT thing that we have seen in Saudi today, if you can throw some color on this environment, what do you feel about that, the impact of that on the consumption? And would you be taking the major share of this VAT, so as not to impact the consumer?

Thank you, Divye. If you look on the last slide in the presentation, we mentioned that the price erosion affected the profitability by around AED 4 million. On a more specific basis, I can tell you that the prices for the water sector were reduced by approximately 2.8% -- 2.9% in the water sector and a little above that in the food sector, which were main driver for the effect on profitability as driven by the price reduction or price erosion. Jamal, probably would you like to comment on the outlook of the competition?

Sorry, just one thing. Is this 2.8% drop in pricing, is it year-on-year basis? Or it is on a quarter-on-quarter basis?

It's year-on-year.

Year-on-year. And can you give us a number on quarter-on-quarter basis? Versus last quarter, what is the price erosion?

I'll give it to you. It's not on me right now. I will give it to you.

Go ahead. Regarding the competition, the second question?

Yes, that we are basically asked about how long do we think that competitors can survive the -- pressurizing the prices. Well, honestly speaking, it depends on what's their profitability margins. At the current prices, I don't think if you don't operate to a specific limit of capacity utilization, you can't turn out profitable. And it's a kind of info that we don't know about the competitors. We're trying to protect and defend our market share for now. Jamal, Divye as well asked a question regarding the outlook of potential or probable acquisition, maybe some sort of elimination to the competition we discussed.

I can answer this one for Jamal. I think we are always, as mentioned before, our strategy is we're always looking for opportunities for acquisition. And definitely, the market is in consolidation mode. And we are looking actively for these targets, I mean going forward to find potential to consolidate market share.

Are you already looking out at a target right now? Or you think you will look out for something in the next 6 months to 1 year?

We are actively looking at several targets within UAE and Saudi Arabia. And just we're trying to find the right target that will match the future strategy of Agthia in terms of profitability and gaining market share.

Okay. All right. I think if you could just add on, is there any -- what is the scope of cutting costs over here? Because we know that it's going to be a tough environment for next 6 months to 1 year. So what is the plan in terms of reducing costs?

We are working...

Go ahead, Jamal. Sorry.

We are working very actively within the business in order to mitigate the impact that's happening due to COVID-19 on different fronts, in terms of efficiency, in terms of how we are procuring, how we're efficient with procuring with different suppliers and all of that. We're looking at our marketing expense, looking at our manpower, looking at -- there are so many things within the cost structure, G&A and all of that. So we are very focused, trying to make sure the -- whatever we decide on, have a positive impact to our P&L. And that's a commitment that's always -- we are up to it. And we always -- and in a way to balance the situation and making sure that whatever we do, it doesn't impact us also going forward because going forward also it's not clear at such when things will be clear back to normal and all of that. So we are doing things while we are very closely monitoring the market.

Yes. Okay. On the VAT side in Saudi, the impact of it?

Say that again, please?

The VAT impact in Saudi.

VAT impact, the new one, which was announced this morning. We will evaluate the effect. I think there will be effect on every sector in the market, not only FMCG, but we will definitely evaluate that one and come up with plans to minimize the effect on our business.

And we are talking about Saudi -- this is my last question. In terms of -- you have been looking out for a target in Saudi to expand your operations into -- from general in Riyadh to overall Saudi. So how far are you on that? Have you identified any target? And if you have, then you think, is this the right time to go and do the deal? Or will there be any delay given the environment is uncertain right now?

There are targets that we are currently -- there are targets that we are currently looking at and evaluating, and whether it's the right time or not, it depends on the clear strategy and the capitalization on the synergies. I think that the way we approach the acquisition idea from Agthia perspective is heavily depending on maximizing the synergies and the cost savings as well as the technology transfer and the logistics between the Saudi Arabia component in terms of logistics and sales and distribution. So not specifically on a specific sector, whether it's water or any other category on an Agthia global basis. I don't see a problem right now for evaluating targets in Saudi Arabia, and then the decision can be made...

Why don't you see a problem? Because how will you evaluate the top line or the growth of your target given the uncertain environment in terms of VAT impact, how the population growth is going to be in the country next 2 to 3 years, the oil prices? So don't you think this is a very uncertain scenario to go and value a target?

Sure.

And why not...

Of course, it is.

This is -- I mean of course, what's happening at the moment, no one knows what's going to come out of it, okay? So there's a lot of impact even during our discussion because of the COVID-19 and because of limitation and restriction of traveling and all of that, that does limit the discussion. So we try to push it in a way or another, do something outside, whatever we can do remotely and all of that. But yes, of course, whatever is happening at the moment, we need to have a clear evaluation of this, which includes, as you said, the 15% VAT, COVID-19 as far as how that will affect the demand, people and all of that. So there's a number of things that we're going to be really focusing on, especially on the deals that we're looking at to do in terms of acquiring or expanding our business in Saudi, or at the same time, looking at the existing business that we have. This is something very important for us, where we are focusing very carefully on.

[Operator Instructions] Our next question comes from [ Fatema Al-Doseri ].

I have a couple of questions. First, regarding your water business, the growth that we've seen in Kuwait, is it driven by increase in market share or an overall growth in the market because of the panic buying that's happening there? And in Saudi, just to clear things up, the decline in sales, was it because of the Hajj in -- lower sales because of Hajj and Umrah? Again, it was just the water business. And then, about the situation...

Can I answer these 2 questions first?

Sure.

Kuwait actually started last year. So last year was not a full year of sales and operations. So this year is the full operations. So you will see an increase in the top line, and as we progress throughout the year, the profitability as well. On KSA, the reduction is driven by 2 reasons. Number one is the, the cancellation of the holy season activities due to the pandemic situation. And the second was due to a revision in the credit policy. The revision in the credit policy was mainly driven by improving the quality of credits. So these are the 2 main reasons affecting the top lines in KSA.

And I'm sorry, on top of that also on Saudi Arabia -- in Saudi Arabia also, there have been a number of lockdowns. So it was restrictions on mobility and the movement of our products to the customers.

Okay. And regarding -- in Kuwait, in particular, has there been any pricing -- pressure on pricing for the water segment compared -- like you've seen in the UAE?

Not -- at least not in Q1 of 2020.

Okay. And just regarding your volume sold, I know you -- the volumes that you announced are based on cases. Is it fair to assume that there is 24 bottles per case, that's the usual measure?

That's the general measurement. It differs sometimes, it differs sometimes. Please, [indiscernible].