Agthia Group PJSC (AGTHIA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Agthia's Second Quarter 2020 Results Call. My name is Jamila, and I'll be coordinating today's call. [Operator Instructions] I will now hand over to your host, Nada Amin to begin. Nada, please go ahead.

Thank you. Hi, everyone. This is Nada Amin from EFG Hermes' consumer and retail research team. It's my pleasure to be hosting Agthia's second quarter results call today. The company will begin with a presentation and then we'll open the floor for Q&A after that. So we'll begin the call. I'll hand over to Ms. Sahar Srour, the company's investors -- Investor Relations Manager. 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 half of 2020 hosted by Alan Smith, our Group CEO; and Ammar Al Ghoul, our Group CFO. On behalf of all of us at Agthia, we wish you are all keeping well and safe. And during the course of this presentation, Alan will first talk about the performance highlights during the period, after which Ammar will cover the financial results. And then we'll 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 the presentation. Over to you, Alan.

Thank you, Sahar. Good afternoon, everybody. So in the first half of 2020, Agthia Group demonstrated resilience and agility in dealing with the uncertainty imposed by the COVID-19 pandemic and its impact and its influence on the operational environment across our markets. Enforcement of lockdowns, movement restrictions caused business disruptions, logistics transformation and changed consumer demand patterns. In response, we reprioritized our resource allocation across our flexible supply chain to ensure business continuity and product availability to consumers at the right cost. We increased stocks of essential food and beverage products. We accelerated our e-commerce presence and doubled the number of delivery trucks for home delivery service to cater to consumer needs and support the community whilst, of course, continuing to adhere to the highest standards of quality and safety. We continue to stand by consumer trust and loyalty in our brands. This is proven by a sustainable leading market position across core categories despite headwinds, coupled with Al Ain Water, our flagship brand ranking #1 amongst the most chosen beverage brand in the UAE and #6 most chosen FMCG brand in the overall UAE market as per Kantar's Brand Footprint Ranking for 2020. In the first half of 2020, the group generated AED 1.9 billion (sic) [ AED 1.09 billion ] of revenues, which represents a 2.6% growth over prior year largely driven by our flour, food and 5-gallon water segments, offset partially by our water business. Group net profits came in at AED 42 million. If we look at the -- looking at the market share position. The 2 charts that we have in the presentation depict the volume and value shares of major players for the last 12 months ending May 2020 versus the same period last year. Agthia's portfolio, Al Ain Water, Al Bayan and Alpin, preserved their market-leading position in the retail channels with respect to volume and value shares at 29.1% and 26.1%. Our flagship brand, Al Ain Water, continues to defend the #1 ranking in the UAE despite an aggressive competitive landscape. If we look at the categories in a bit more detail and looking at water volumes, our 5-gallon water business in the UAE recorded strong growth in volumes and sales on higher demand, particularly from homes and retail channels, which compensated headwinds in the corporates channel. During the same period, we sold over 35 million cases of bottled water across the UAE, KSA, Turkey and Kuwait. In the UAE, there was a decline in volume largely driven by the result of lower consumption due to restrained tourism and the COVID-19 impact on the hotels and food service channel. In Kuwait, our operations continue to perform well, whereas in U.S.A. (sic) [ KSA ], sales were hit by the enforced short-term lockdown in the market and the reality of religious -- the void religious tourism and elevated movement restrictions in the western region, whilst reflecting on our adopted strategy improving the quality of our credit sales in Saudi. Our food business had a very strong half of the year. Food segment net revenue increased by 27% driven by boosted demand for food items and our tomato paste and frozen vegetables in both the UAE and Egypt in response to COVID-19. Trading items, which constitute 52% of food revenues, recorded 25% year-on-year growth in its top line as we capitalized on our swift response to the imminent challenges by opening 2 new branches, adding new SKUs and activating home delivery orders and drive-through facilities since the first quarter of the year. In tomato paste and frozen vegetables, revenues from UAE and Egypt grew by 32% versus last year as we expanded to the catering channel, increased market share and accommodated consumers' increased demand. As for bakery, we recorded a higher sales as a partnership with local authorities to support the food security initiatives. Meanwhile, dairy sales continue to be largely impacted by the closure in or partial operations of eateries. As for our overall profitability, food segment margin were enhanced on elevated volumes and optimization in our supply chain. This moves us on to our agribusiness. Our flour segment posted strong top line growth of 29% versus prior year driven by higher domestic demand, wheat trading and also export sales, which included the World Food Program, which we discussed in the first quarter. Additional milestones under the flour segment has us maintaining the #1 leading position for retail flour by volume and improving our overall segment profit margin versus prior year. On the other hand, animal feed revenues lagged behind last year on lower grain trading and lessened local demand amid new controls to restrict commercial farms from subsidized trading in animal feed in the open market. I'll now pass the line over to Ammar to give you details on the financial view. Thank you.

I'm so sorry, ladies and gentlemen, we've lost connection with Ammar. Please stand by whilst we connect.

Hello?

Ladies and gentlemen, we have Ammar back into the line.

Hello, Jamila? Can you hear me and the audience?

Yes, Ammar.

Okay. Thank you. I was actually on the line. I heard Alan and I started until I heard Jamila saying that you'll [indiscernible] Ammar again. Anyway, good afternoon, everyone. Thank you, Alan, so much for your starting. Starting with the group revenue, the revenues grew by 2.6% year-on-year, reaching AED 1.09 billion in the first half of 2020. Net revenue contribution by consumer business reached 54%, and the remaining 46% were contributed by agri-business. Consumer business revenue dipped year-on-year by 2%, reaching AED 584 million, out of which the Water & Beverages segment posted sales of AED 112 million and the food segment the remaining AED 172 million. The rise in each of the food segment, Kuwait operations for AED 9 billion in the first half of the 2020.

Jamila, I think there's an issue with the line.

I'm just going to dial out to him again if you don't mind holding.

Apologies to everyone on this inconvenience.

Hello?

Yes, Ammar.

Yes, Mubarak. Did you hear the revenue section? Or I shall take it -- take an audience, do it again? Anyway, it's a short brief. So back to -- start from the revenue. The group revenue grew by 2.6% year-on-year, reaching AED 1.09 billion in the first half of 2020. Net revenue contribution by customer care -- consumer business reached 54%, whereas the agri-business contributed the remaining 46%. Is my voice clear to everybody?

Yes, Ammar.

Consumer business revenue dipped by 2% year-on-year, reaching AED 584 million, out of which the Water & Beverages segment posted sales of AED 112 million and the food segment the remaining AED 172 million. The rise in each of the food segment, Kuwait operations and the 5-gallon water business was largely offset by the flip in the bottled water sales in UAE and Saudi Arabia mainly. Agri-business revenue recorded AED 506 million and grew by 9% year-on-year on higher flour sales, as elaborated earlier by Alan. Moving to the next slide, where we talk about the gross profit margin which, in brief, improved as compared to Q1 2020 and slightly down as compared to Q4 in 2019. The current quarter gross margin came in at 31.4% versus 31.8% in Q2 2019 and 29.9% in Q1 2020. The higher quarter-on-quarter margin is largely driven by the higher volumes across each of the bakery and tomato paste as well as the frozen vegetables, coupled build enhanced efficiency and distribution of the 5-gallon business. In comparison with Q2 2019, the slight drop in the margin is mainly attributed to the unfavorable sales mix with the higher contribution from food segment as opposed to other highly profitable items such as the bottled water. Moving into the group net profit where we have added the last building blocks column, which is partially normalizing the net profit by eliminating 2 significant one-off transactions, which I'll be talking about in a minute. The group net profit prevailed at AED 42 million. Enhanced agri-business profitability as well as cost optimization and excluding the one-off tax credit recorded in Turkey last year marginally lessened the aggregate impact of the following: the unfavorable sales mix with lower volume from the bottled water category in UAE and KSA particularly; two, bad debt provisioning against longer collection base in the international markets; and finally, the extra manufacturing and logistics cost born to guarantee business continuity in the unprecedented times. We know that by excluding the one-offs in H1 2020, particularly the bad debts provision as well as the Turkey credit, net profit shortfall will be half of what we have really entered in, in this half of the year. This is further explained in the next slide, where we will show 2 waterfalls that explain the top line and the bottom line reconciliation between last year and this year on a 6-months basis. So as you can see, starting with revenue, AED 39 million related to the World Food Program flour order plus AED 19 million higher wheat trading have largely countered the loss in revenues against the lower volume of the beverage and the excise tax and of the bottled water in UAE and KSA on the restricted demand from struggling food services segment and tourism in particular. Robust growth momentum across our flour and feed segments as well as Kuwait operations and the 5-gallon water business has resulted in an additional organic growth, taking our net revenue to AED 1.09 billion. In addition to resulting impact of the above items on the profit, we highlighted 4 more variances. We recorded AED 9 million in -- as an additional profit from the agri-business along with the enhanced efficiencies across our value chain, which more than offset one-off AED 5 million tax incentive from our Turkey subsidiary recorded last year and this year bad debts provisioning against longer collection days in the international markets, particularly. With this, we conclude today's prepared remark, and the floor is open to you for Q&A. And thank you so much for being with us. Sahar?

Jamila, could we please see if you have any questions?

[Operator Instructions] We have our first question from Nishit Lakhotia from SICO.