Almarai Company (2280) Earnings Call Transcript & Summary

Good day, and welcome to the Almarai Q1 '20 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Nauman Khan. Please go ahead, sir.

Good morning, ladies and gentlemen, or good evening. On behalf of Almarai and NCB Capital, we welcome you to Q1 2020 Almarai Conference Call. On call with us is Almarai CEO, Mr. Majed Nofal; the CFO of the company, Mr. Paul Gay; Mr. Ikram Ulhaque, the Head of Finance. I now hand over the call to Almarai management for their management commentary.

Nauman, thank you very much. Welcome to, ladies and gentlemen, to the Almarai earnings call conference call for the first quarter 2020, which is organized today by NCB Capital. I am Paul-Louis Gay. I'm actually the ex-CFO of Almarai, because, as you know, as of yesterday, the company has nominated a new CFO. His name is Danko Maras, he will be introduced to you in the next 2 minutes. I'm joined today by Majed Nofal, our CEO; and Ikram Ulhaque, the Head of Finance, to attend the call. I would like first to let Danko introduce himself as our new CFO, Danko?

Thank you, Paul. Well, first of all, I would like to say that I'm very excited to join Almarai. It's a great company with an impressive legacy. And I hope that I will be able to contribute to that legacy going forward. I have 25-plus years in fast-moving consumer goods around the world. A large part in Unilever, but also in other listed companies in the last 10 years. Under normal circumstances, I would have looked forward to meet you all in person as part of my introduction for those investors and analysts who want to. But under these challenging times, we are at the moment, we just have to adapt them and wait for better times. I am fully operational from now on. I look forward to covering the Q2 results with you. But in the meantime, I give the word back to Majed, Paul and Ikram.

Thank you, Danko. Thank you very much. So all the investors on the call, I assume that you have all downloaded the 2020 Q1 presentation from our website. For those who have been unable to download it, please go to the almarai.com website, Investors Relations Presentation folder, and you will find the documents. At this point, I would like to hand over to Majed Nofal, our CEO, who is going to take us through some market dynamics, and importantly, the issue of the coronavirus impact on our market and our business. Majed?

Thank you very much, Paul. Good afternoon, and good evening, and good morning to all of you, ladies and gentlemen. This is Majed Nofal speaking. And we thought that since -- and we have been under this operating mode for quite some time that it is fair to update you about Almarai's response to the current COVID-19 situation and to throw and shed some light on what is happening at the Almarai side when it comes to managing this extraordinary status. Almarai's response and summary began by focusing on 2 areas: people safety and continuity of supply. Under people safety, we have done many initiatives in a very short period to ensure that we address either the guidelines of the respective countries that we operate under and make sure that our people are safe and under very, what you call it, fine situations because Almarai houses, under our facilities, more than 30,000 of our colleagues across all the activities. And we have introduced, of course, for the head office, the ability to operate remotely. We have all noncritical staff off. And we have developed a very robust internal communication tool to make sure that we are able to connect with every employee across. And I'm glad to announce that till today, we have not really reported any case among our universe and Almarai family members. And the other area, of course, is supply. We have a role to play. We are the largest food company in the Middle East. And with what we have seen of the dynamics we realized early on that we need to make sure that we gear our operation to be able to cope up with the changes and the dynamics that are happening around us too fast. So what we did, we have called in a lot of material ahead of the curve. We have invested a little bit in our working capital either on the feed or raw material or whatever, so we have been very generous on calling that early on. We decided to lock down all critical sites. Lockdown means that only entry to those sites is allowed for commercial movement of goods. The people will reside on-site, they won't go home for 2 months. So all our critical sites, poultry farming, dairy farming, poultry plants, bakery plants, all of them are operating under full lockdown, and we are in the process of even further enhance and lower the traffic around our CPP and Al-Kharj. And we have managed to grow our volume, and we have managed to gear up supply and we have managed in a short period to respond to what I would call it, the quick change that has happened on the ground. At the moment, the third pillar that we are working on -- the third key area of focus that we have introduced recently is our operating model. We realized that we had a situation where thousands of our colleagues are stuck abroad, they could not come back. Many of us feel that also people here in their respective countries and markets won't be able to leave easily in the near future. So we found ourselves in a model that most probably will continue to be under the same pressure for at least 3 months, or I would call it, the operating model. So we are now working on developing the 3 months operating -- not plan, the operating model. And hopefully, we could extend that for a longer period, if this is realized. Moving on to Slide 6. Many trends and many changes and dynamics. And I think sharing with you a little bit of a feel around how would this impact us. If we look today at the spending, of course, in such times, we might see a little bit of essentials and less on nonessential on the medium term. And we know that the category exposed to such among our portfolio will be juice. At the moment, we have not seen yet such an impact, but this is only predictions of what could happen. Foodservice definitely have been challenged. And we have seen that, as you all know, that foodservice operations are in a way either constrained or not operating. And this has affected and have a high impact on the revenue stream out of it. However, the retail pickup has been much higher. We are exposed. As you know, we are a company that sends 30% of our revenue into neighboring markets, GCC countries. We are not aware that this is something of a high risk. And this is why we say it's a low risk. But you all know that the situation around GCC and the unity of GCC and the dependency, and this is -- as you all know, has kept all the goods moving. And of course, we know that on a medium-term horizon, we might be exposed to spending in case of higher unemployment level. So we know that this might be too early. And of course, we have to assess how food service might be able to bounce back and see how does it impact us, but we think that this is quite medium, not significant. The last thing actually, which I want to go through and just to give you Almarai commitments, we are aware that this is a situation that will continue, and we are aware that -- we are serious into analyzing the consequences, understanding how we will manage that. We are also taking all necessary actions under our control to make sure that customers and employees are all safe. We are confident that we still have many growth opportunities. We have announced today to the market as -- if you followed an announcement that indicates Almarai commitment toward food and food security of the region. And this is something -- is a serious mandate that we will always keep carrying. And we are investing behind our brands. This was probably one of the years that we have increased, and we have committed ourselves to a bigger communication plan than what we have done in the last years. And we are driving a lot of investment behind our brands to support actually us getting back into the growth. As you have seen, we are nearly getting close to hopefully show double-digit growth in the near future. Our business is resilient. You have lived with us in 2015, '16, '17, and you know how Almarai operates and we came out of very challenging times and today we are experiencing maybe a situation on the medium term that won't be far from what we experienced in the past. We have a very -- our management team has been with the company for quite some time. They are all experienced guys. They are all up to the mark. They are helping in managing this company remotely. So we haven't seen each other for the last 3 weeks. So we have all been distanced and operating behind the scene as many of you would have. But this is our commitment, and this team, hopefully, will continue to deliver. And we know that there is a lot of unknowns. There is a lot of potential impact on 2020. It's very difficult to give an accurate impact for the full year 2020. But I think in the context of the Q&A, maybe we will be able to give you more input around. Thank you very much. It was a pleasure, and back to you, Mr. Paul.

Okay, Majed, thank you very much for these words. If we move to Slide 8 of the presentation, we have provided you some market share data. Of course, these are dated February, and I do realize February is not March. But what we see from March, I can confirm that Almarai has kept, during this period, its market leadership, except in UHT milk, where we are traditionally #2. In all categories, we have kept, as per this chart, our market leadership, which is good to know and good to keep in mind. I would like to move to Page -- the next page on business performance, Page 10. And these are the key highlights for the quarter. The first one is revenue. As you can see from the slide, revenue grew by 9%, generating SAR 284 million additional to the top line quarter-to-quarter. This was essentially originated by Foods, Long Life Dairy and Poultry, which I will discuss in a later page. If we move on to operating margin, you see that operating margin over the second period grew only by 5%, but grew 5%, generated SAR 26 million additional to the bottom line. The reason why we're at a lower rate than top line is, as you know, because of increasing costs in alfalfa cost, reduced ingredient costs that had cost us an increase in cost, labor costs essentially linked to expat levy and the related costs and trade support costs, particularly in modern trade, which has grown significantly during the quarter. If you move on to net income, you see that net income grew 14% quarter-to-quarter because of -- on the top of the operating growth, we have had good news on the interest line due to the slight deleveraging we are going through, and the improved sales efficiency in the cost line. So 14% growth of net income, this is the first time for a quite long period of time where we have, indeed, a growth quarter-to-quarter. If you move on to working capital, you see that red number of SAR 447 million. We have indeed undergone a very stressful quarter essentially because of trade receivable. Inventories are behaving properly, but trade receivable because of the extension in modern trade, which is, as you know, carrying credit, has cost us some working capital investment. There's also 2 factors of timing difference in some payment of insurance bills and receipts from the government, which we received after the closure. So part of this one increase is timing difference. But yet, this is something we have to work going forward. CapEx, as we have always said, we are putting a break on CapEx, and you can see clearly the decrease in CapEx quarter-to-quarter and this is according to our plan. And of course, the free cash flow is behaving less positively than last year, but yet remained positive at SAR 39 million, essentially due to the trade receivable effect we have had in Q2. If you move on to the -- where does the growth come from? Slide 11. By geography, you see that the SAR 284 million are coming from all over the region, except Oman, where in Oman, we have the introduction of a competitor sponsored by the Omani government, which is costing us some market share loss, but we believe this is only happening at the entry point, but we will resolve after a while. All other geographies, particularly our core businesses of KSA and UAE are growing steadily. UAE, Egypt and Oman and Jordan are growing well as well as Kuwait, where we had a tremendous push in Kuwait, but particularly because of Poultry and Food. If you move on to the next slide, you have the same information graphically. As you see the growth by quarter, 22% in Kuwait, 35% in Jordan, 16% in Egypt and 8% and 7% in our core markets. If you move on to Page 13, the growth by product category, you can see that majority of the growth is coming from Food, Poultry and Long Life. That were the 3 product categories, recording double-digit growth over the quarter and account for 80% of the total growth. Another good news for the quarter is Fruit Juice, revenue returned to growth after months of decline and has started to rebound from the decline quarter of the past despite the challenges brought by sugar tax introduction implemented on December 1, 2019, a good performance of Fruit Juice this quarter. If you move on to Page 14, which gives you the growth by channel. You can see that modern trade indeed contributed and foodservice contributed a lot to the growth. Of course, foodservice in the month of March declined significantly. So one can say that the majority of the growth of the quarter has been gained in the modern trade space. If you go to Page 16 -- 15, sorry, you will see the revenue growth on the trend -- trends dimension and the 12-month rolling dimension. Our KSA market is growing at 7% on the 12-month rolling basis, so it's a steady growth from Q4 and Q1. We see also growing other GCC, particularly in UAE on a 12-month basis, 4%, 6% this quarter, so this is good news. And the other markets are trending well as well. So the rebound we've seen in the second half of 2019 seems to be maintained in Q1 2020. Now if we move on to the next slide, I will let Ikram continue the presentation.

Thank you very much, Paul. Ladies and gentlemen, as you've heard Paul talked about revenue growth over the previous slides, and you heard Majed talked about one of the key focus for the quarter was on fulfilling consumer demand, but please rest assured that it hasn't deterred us to continue our innovation drive. I would like to take you through some of the examples of innovation during the quarter, and I'll start from left to right at the bottom of the slides. And one of the key innovations were hummus, special packaging for fresh cream for foodservices channel, new cupcake packaging, premium juice flavors and new premium poultry products on meat cube and meat strips. I would like to move to the next section of financial performance, and we'll start directly from Slide #18. So if you move to Slide 18. The slide is about Q1 financial performance, and Paul has discussed revenue growth in detail, so I will focus mainly on operating profit and net profit growth. So operating profit, it was up 5.4%, but it was lower than the revenue growth of 8.6% mainly due to higher cost of imported alfalfa, juice ingredient costs, higher labor cost and higher bad debt provision, which we took at the end of the quarter. However, net income was up 14%, and Paul talked about it before as well, that's mainly due to lower funding costs due to deleveraging as well as rate variance and positive NCI due to higher losses in IDJ, majorly caused by higher depreciation in [ Bakery ]. I will now move to Slide 18 (sic) [ Slide 19 ] to discuss segment performance. On this slide, I will focus on growth numbers in the green boxes in the middle of the page, and I'll discuss both revenue and profit margin for each segment, one by one. The first segment is Dairy & Juice. If you see on the slide, the revenue growth is 8%, but income growth is only 0.9% mainly driven by, as I explained before, higher alfalfa, juice ingredient costs, bad debt and higher depreciation from IDJ. The second segment is Bakery. The top line growth is 2.8%, but the profit growth is 20.9%. This is because the fixed cost leverage is now assisting this segment back to a normalized EBIT. Bakery segment is now reporting 13.7% net income margin, which is a more reflective picture of Bakery segment historic trends. The next segment is Poultry. Higher revenue growth of 11.8%. That was underpinned by volume growth of around 8.6%. It highlights the channel shift in the segment, and you heard both Paul and Majed talked about it before. We had higher pricing in the food services channel from the beginning of the quarter. We had a much more positive retail channel sales at the end of the quarter, and the positive revenue growth resulted in higher margin and accordingly higher net income growth, because of mainly fixed cost structure. I will now move to Slide 20. Slide 20 is a continuation of segment contribution from previous slides, and I'm super pleased to report that after a very long time, all the numbers on this page are green, highlighting the turnaround and profitability growth of every segment level. The main highlight on this side -- this slide is the Poultry net profit increase of SAR 31 million, which accounted for nearly 60% of the total profit growth of Almarai for the quarter, which was SAR 48 million. With this, I will conclude the financial performance section, and we'll go to the next section of CapEx, capital management and share performance. If I could ask you all to go directly to Slide #22. The first slide in this section is cap expense. As you can see, compared to a few years back when CapEx run rate was nearly 30% of revenue, CapEx run rate in 2020 is around 9% of revenue, which is more reflective of CapEx trend going forward. The inflow of new CapEx approval has dried substantially, however, the existing project are still attracting cash investments. The new projects were centered on mainly poultry farming, manufacturing in KSA and Egypt, enhancement and distribution capabilities, including vehicles. I will now move to next Slide #23, which is about the 12-month free cash flow. Almarai recorded a very strong free cash flow at SAR 2.4 billion for the last 12 months. The run rate is slightly lower than the last quarter due to seasonal and timing movement in working capital mainly driven by trade debtors as we -- you've heard us talk about how modern trade is growing much faster. However, during the year, we expect free cash flow to move towards our 2020 free cash flow target of SAR 3 billion plus for the year. Secondly, if I can ask you to move to Slide #24. There are 2 major trends I would like to discuss on this slide. The first on the left-hand side is the net debt trends. As we discussed in previous page, with higher free cash flow generation, the net debt is now starting to come down and stood at SAR 12.3 billion. Net debt-to-equity ratio has now reached 80% and net debt-to-EBITDA ratio is now at 3, a reduction of 0.1 from the last quarter. We remain on track to achieve a net debt-to-EBITDA target of 2.5 to 2.7 over the next 12 to 18 months based on increasing operating cash flow, lower capital investments and better working capital management going forward. The other chart on the slide, on the right-hand side is EBITDA and EBIT percentage. Net EBITDA at 27.7% and EBIT at 17.1%, slightly reduced from last year as the growth in top line has not resulted in growth in bottom line due to cost increase, as we discussed earlier. The next slide is debt maturity slide on Slide #25. The first chart is about debt maturity by age and type. And as you can see, it confirms the level of gross repayment every year for Almarai, and are mostly in line with free cash flow generation, as we discussed before. The second chart is about Almarai debt profile. It highlights the banking lines are still the biggest contribution of funds at 49%. However, we still have ample liquidity in place while have committed and uncommitted lines, and we're working on further plans to ensure that liquidity flow continues to be smooth for Almarai as it has been in the past. Almarai average debt tenure remains at 4.27 years. With this, I would like to pass the presentation back to Paul to take us to the end of the presentation. Over to you, Paul.

Okay. Thank you, Ikram. If you move to Slide 26, this is the slide of performance of shares. I just wanted to point out that on Sunday, Almarai has held for the first time in KSA, as far as I know, the first virtual AGM, or a General Assembly of shareholders, with electronic means and voting rights and everything went smoothly, and this is an achievement. So we at Almarai tend to make sure that we are providing, despite the adverse event, enough transparency and communication to our shareholders. This has reflected in a total shareholder return of 13%, as you can see on this slide since IPO. Stability of our shareholding base, of course, and a share, which has today closed at SAR 49.50, which is basically back to the level of the 1st of January. I think the share performed pretty well after the announcement of the result of the quarter. If you move to the Page 27, I just want to highlight, yes, indeed, the total shareholder return includes the dividend payment. And as you can see, despite the difficult environment we are in, we have committed to deliver a dividend amount of SAR 850 billion (sic) [ SAR 850 million ], which is something to keep in mind and remember going forward. I would like now to close this presentation, and I'm sorry if it was slightly longer than usual, by key takeaways in the last slide, which is the Slide 29. So to sum up, our priority during this quarter has been and remains the safety of our customers, employees, and it will remain our #1 priority, and we are working around the clock to make sure of that. Almarai is developing multiple scenarios under the leadership of Danko for future operation. Of course, future is uncertain. It doesn't mean we are -- we should do nothing. So we're trying to develop the scenarios to be ready, depending on the speed at which the coronavirus containment is achieved and the expected change in economic output. As a result, Q1, a net income growth of 14% is strong, and we have not been, in Q1, significantly impacted by the coronavirus. Poultry segment has demonstrated its very strong contribution to profit growth and we expect that trend to remain. By the way, today, we have announced our commitment to this category by further investment in this integrated poultry supply. Foodservice channel is showing signs of stress, however, the retail channel and particularly modern trade is rebounding. Cash flow generation despite the stress on the receivable, it remains strong and liquidity is ample, and we are developing additional option to face the uncertainty of the future. So on that note, I would like to pass it on to Q&A section, and I would like to pass it to the organizer to open the questions.

[Operator Instructions] We will now take our first question.

This is [ Farooq [indiscernible] ] from [ Blake Management ]. Three questions, if I can, please. First question is regarding the foodservices and HORECA business. So Q1 numbers, I guess, were relatively reasonable still, but I assume most of these fast food chains, hotels, et cetera, are operating at very low levels or completely closed. So are you already seeing significant sales pressure from the HORECA and foodservices business?

Can you ask the other 2 questions, please? So I can make sure, which is the second question?

Second question is, what are the difference in payment terms between the modern trade and the informal stores? And the third question is, you mentioned today, you've announced an investment or expansion in the Poultry business, and this is another umbrella of national food security, but is there any potential conflict between targeting national food security, the ownership of the sovereign wealth fund and what it means for minority shareholders? Because ideally, all of these parties should be aligned, but is there a risk to that national food securities put before [ redundant ] than before minority interests?

Thank you for the question, I will let our CEO, Majed, maybe to answer your last question, and Ikram will take care of the first 2 questions, and myself.

In response to the third question, I think we all realize the significance and importance of the role that Almarai plays into the basic food supplies and to the markets that we operate in. We are the leader in Dairy. We are the leader in Bakery. We are the leader in Poultry. And we are the leader in Juice and we are the leader in Foods. We are a company that basically develops and creates and cater to demand. And of course, Poultry has been performing. And Poultry, as you know, is part of Saudi Arabia [ vision ] document. It's a key. It's the largest food category in the country. And in general, the interest among all stakeholders to increase poultry capacities in the country is very high. And this is something that we took as many others on our agenda, and we decided to further increase our capacity in Poultry, including expanding into the [ grandparents ] so we can support the vertical integration of our operation. Back to you, Ikram.

Thank you very much, Majed. So for coming back to the terms and condition for modern trade and traditional trade. Modern trade, average debtor days will vary between 70 to 75 days on average, it's end of month plus, let's say, 30 days or 40 days. That's the credit we give. So that's mainly on the modern trade. Traditional trade, the terms of reference, actually, we sell most of the fresh products on a cash basis mainly it's the Long Life product, which will go on credit. And that's between 30 to 35 days to give them a rolling credit. So you can argue the difference between the 2 is about 30 to 35 days. Foodservices is decided each customer individually and depend on the size of the customer and depending on the size of the deal. This is the different terms and trade we're running through. In terms of how what we are feeling in foodservices? What we're seeing on the ground? We are starting to see requests of some foodservice customers or companies for extension of credits. And that is the only segment. It is still about, I would say, 10% of our total debtor base. This is why we took a very big bad debt provision as well. We're very comfortable that we will not be exposed massively, but we do see pressure mounting up in foodservices channel. Retail channel remains on track. They are paying on time. They actually are expanding capacity. So 90% to 95% of our debtor base, we don't see any issue. But on the foodservices, we're starting to see signs of stress. Maybe, Paul, if you would like to extend further on that part too or Majed, maybe?

No. I think to conclude this, the answer of Ikram, is that indeed, credit is becoming very high on our agenda. We have been looking at specifically customer-by-customer type each credit terms, and we are monitoring as we go the risk. We have taken a provision ahead of the event to make sure we'll have no bad surprise going forward. But this is a risk. We have to keep the eyes open, and we'll make the necessary decisions as we move along.

Okay. So sorry, you highlight on my first...

Yes. Go ahead.

I was saying on my first question, I also meant demand from the foodservices. So if cafes and restaurants and hotels are largely closed, is that demand down 60%, 70%, 80%?

Let me comment, Paul, on that, please. It depends, as you know, foodservice has -- still operates in certain countries and certain markets. And as you know, we are exposed to different countries. We have seen some -- that went as down as some has closed and basically disappeared, some as -- at 90% drop. And in general, I would say that there has been more than 50% drop in the foodservice in totality. And we would expect that to stay at its levels for some time.

We will now take our next question.

Saul Rans from Morgan Stanley. I have 2 questions, please, if I may. First of all, in terms of your revenue growth in the quarter, I don't know if you're able to -- I don't know if you have visibility on this, but in many other locations like here in the U.K., we've seen a lot of sort of panic buying and hoarding of food and groceries by the shoppers in the supermarkets. I'm just wondering if you have any feeling of whether your revenues in -- towards the end of the quarter benefited from any of that kind of panic buying or excess buying by customers. That would be my first question. And then my second question, please, is the following. So the economic outlook in Saudi Arabia is facing 2 new challenges, obviously, the macroeconomic challenge from lower oil prices and then the coronavirus. Commonly or at least sometimes these kind of events can create opportunities for the strongest players in the industry. So what are going to be the opportunities for Almarai from this more challenging environment over the coming months, please?

Okay. Saul, I will let Majed answer your second question, which is of a strategic nature. And Ikram will answer your revenue question.

Let me start with the second question, please. We totally understand that -- the situation around subsequent, hopefully, to this situation, and when we return back to probably more of business as usual. As you said, we all understand that opportunities will rise. We had a plan, and we have been eyeing many activities, many businesses, and this plan has always been updated and looked at and always a live document to keep looking at opportunities. And we fully agree that the situation subsequently will create a lot of opportunities. And part of what we have announced today, if you have followed us, we said that we will be expanding into essential food production. And we are a resilient operation as a company that has demonstrated the capability of navigating through difficult times. And I'm sure that we will exit out of this as a winner. Back to Ikram on question one.

Thank you very much, Majed. So Saul, coming back to the growth factors. If I look at February numbers, and we have done 8 weeks, 9 weeks in the quarter, we were still on track for about 7% to 8% growth year-on-year. I would argue that perhaps the growth accelerated. And it's hard to tell, it's because of what we have achieved. But I would expect perhaps about 1% of the growth we have witnessed in the quarter was accelerated during the last 2 or 3 weeks. Now I would like to explain 2 more things on this part. One is we sell everything on consignments. And especially on the long-life products, whenever we're selling on consignment, we always take a higher wastage provision as well, the things might come back to us. So for us, we have been very conservative in terms of when we finalize the books with auditors. We have taken every possible provision. And what we observed is we would have still reported 7%, 8% growth rate. But perhaps it was accelerated as you talked before, by about maybe 1% growth, which was coming through from higher buying in the last 2 or 3 weeks.

We will now take our next question.

This is Adnan from Jadwa Investment. Congratulations on the strong set of results. I have a couple of questions. One, the growth in foodservice during the first quarter year-on-year was mainly due to Poultry or other products contributed towards that as well? The second question is, we noted some decline in market share in the Poultry segment. What are the reasons for that? Is that because you're moving away from foodservice segment? What could be the reason for that? And the third question is regarding the subsidy related to fresh milk. We understand that subsidy was lifted on a few inputs like corn and soya, has there been any update from the government regarding that? And if you can provide any color on that that would be great.

Okay. Maybe, Majed, you can pick up the subsidy question because you -- and Ikram, the other questions.

The subsidy, as the announcement that came late in 2019 was basically redirecting some of the subsidy into -- rather than raw material or input or feed to production and which we have seen in Poultry. And we have made a follow-up announcement to say that -- and on Poultry, we probably will have no impact on the long term because it's redirection from feed into product. However, there has no alternative plan introduced for Dairy, which means there is nothing formally communicated. We know that there is a request via the Dairy Committee to the ministry and to the authorities to consider that in order to stabilize pricing in the country. But as the official situation now, which we are aware of and which we are planning accordingly, is there is no subsidy for substituting subsidy for a dairy feed and Poultry. Ikram, please?

Yes. And then coming back to your question regarding growth in foodservices. Growth in foodservices and Poultry was pretty flattish. Actually, it was growing very fast at the beginning of the quarter. But as the quarter, as we talked before, we moved a lot of volume towards retail. And actually, we were fulfilling -- we were still not able to fulfill full demand in the retail segments. So the majority of the growth in foodservices, virtually all of it is coming from either food products, which is cheese products. It's coming from Long Life Dairy, and it's coming from Fresh Dairies. So foodservices for Poultry has been relatively flat for the quarter. And that gives us another avenue of growth. And you saw the announcement earlier today as well. And we do see huge market potential in that area to go forward. Now coming back to it, your question regarding the market share of Poultry. Sorry, Adnan, I missed your second question in full?

Yes. I was -- yes, the market share in Poultry has declined from 37% to 34%, I was just wondering what could be the reasons for that. Is that because of production constraints or just dumping by the players, what is the reason?

Look, I would recommend to probably wait for period 3. We do see a lot of fluctuations of 2 or 3 percentage points. If you have the charts we shared with our investor group, you will see a lot of fluctuation depending on the supply side. I don't know the exact reason, honestly, on the top of my head, I'll come back to you. But you'll see the market share would have grown dramatically in March.

Okay. And just one follow-up question. So you're now -- CapEx is 9% of sales, and it has gone down substantially. Would it -- for a company like Almarai, long term, if there is no growth in the market and you don't have to do any expansion CapEx, would 9% to 10% be a good range to assume for a company like yours?

Let me take this one. The ongoing CapEx replacement rate for a company like us, assuming no major growth or no major investment, is around 7%. 7% to, I would say, argue, 6%, not 9%. We're still too high. So this is -- there is no magic number, but this is my 10-year CFO experience. I would set the number between 6% to 7%.

We will now take our next question.

It's [indiscernible] from [indiscernible]. Just a couple of questions. So I wanted to ask about CapEx that was just covered just now. In terms of dividends, would you expect dividends to be in the similar range to previous years?

Dividend is obviously not... yes. What is your second question?

I've got a couple of questions. Yes. So the other question is, net leverage 2.5 to 2.7x over the sort of next 12 to 18 months, and net leverage value internal policy. And third question, which is probably more sort of a broader question about the business. Can you talk a little bit about the segmental expectations for 2020 in the COVID-19 context in terms of -- so away from foodservices, maybe through the retail channels, which segments do you expect to perform particularly well in this environment?

I will let Majed, maybe, answer your last question. I can take care of the first 2. And regarding the leverage, we have claimed since some time now to reach from the 3x net debt-to-EBITDA level we are currently sitting to reach 2.5. And this is a target we've set ourselves in order to maintain and improve our credit rating vis-à-vis the credit rating agency. And of course, this was pre-coronavirus prices. Now I still maintain, and this is what we have said that we are aiming to reduce from 3 to 2.5 to 2.75. In the presentation, it say, in the next 12 to 18 months. I would say, most probably in the next 12 months, we'll be able to achieve 2.5x because of the certainty of CapEx declines. The only question mark would be the receivable aspect. But the rest is very strong. So I would say we should still commit to 2.5 to 2.75 in a maximum of 12 months horizon. Regarding the dividend. Dividend is not -- as you know, is beyond my paycheck. This is a shareholder decision. We have a policy and we have a practice. There's no indication today as we speak that the policy or practice we have been living with will change. So in terms of financial analysis, you can expect the dividend payout ratio to remain constant, bearing extraordinary events. We have maintained our current dividend policy in the last AGM, 1 day ago. I mean this has been reconfirmed. This is all I can say on dividend. Maybe, Majed, over to you.

Thank you, Paul. Commenting on segments and the effects of the current situation, I think -- probably I mentioned early on that there's a very high level of uncertainty and quick decisions that are -- there is a series of decisions that are taken by all the relevant authorities in the markets that we operate in, and they keep changing by the clock. And yes, there might be some segments that would definitely benefit on the short term because simply, there is more of home consumption rather than out-of-home consumption. So any category that would be sold in the houses will be definitely benefiting. So I think it's difficult even to predict because I just -- I was just now made aware that the authority has allowed restaurants to open up again, and just now. But they won't be receiving people, it will be for delivery and pickup. So there is always things that are changing and we'll keep moving. However, as you know, foodservice contributes probably around maybe 12% to 13% of our revenue, and we lost some of it. But in replacement, we have picked up a good volume out of the retail channel. So hopefully, that will keep balancing and moving into healthy trends going forward.

We will now take our next question.

I have a couple of questions. The first one regarding your recent announcement about the expansion in the Poultry segment. Can you provide us with more details about maybe time line or the additional units? And then my second question, seeing that Fresh Dairy reported a flat sales year-over-year. So I'm wondering if in term of the profit, would we see a positive growth or a negative growth?

Maybe, Majed, you can take care of the first one on Poultry and Ikram, on the question on Dairy.

Yes. Thank you. In Poultry, basically, we have -- I wouldn't really highlight a lot, but I will tell you, we have 3 processing lines. And we are adding a fourth one. So this is in term of a capacity addition. We are also targeting for it to be hopefully ready before -- after Ramadan of 2021. So the target time line is Ramadan -- after Ramadan 2021, and it's one more line to our existing 3 lines. Ikram?

Yes. Regarding the first question on Dairy profitability. Look, we are experiencing still very strong growth within the GCC. We have experienced some stiff competition in Oman, and that is resulting in lower growth in the lower Gulf area. But if you look at the other GCC parts, especially KSA, the Fresh Dairy is still growing very strongly. It's not growing, I would say, double digit. It's low single digit, but it's nevertheless, very positive growth. So -- but overall, the dilution comes through because Oman's share was quite significant in the Fresh Dairy, and that was the reason for a flattish. In terms of profitability, as you can imagine, majority of the operations are based in KSA. And as we grow further into Dairy, Fresh and Long Life both, the profitability is improving quite remarkably. It's just that we have been faced with very high pressure in terms of the alfalfa cost, the expat levy, the juice cost. That's why the Dairy segment profit isn't growing as fast. If it wasn't for this, the profit growth would be even stronger than the revenue growth.

Okay. So in terms of profit margin going forward, do you think it will decline or stay at the same level?

Look, I think we can allow it... Yes, you first.

Yes. I think the answer here, we have to be prudent. I think Dairy space, Long Life, Fresh is going to be under pressure for some time in KSA, for the reason expressed by Ikram and also for the fact that there is an oversupply of goods of milk, if you will, which have not gone away. So to answer your question, should we be prudent in projecting Dairy profitability forward? I'd say, yes. I don't see a major case for improvement. I would say there is certainly a case for decrease, slight decrease, to answer your question.

[Operator Instructions] We'll now take our next question.

This is [ Ali ] from Morgan Stanley. I have 2 questions. Maybe the first question on the oversupply of milk. Can you please elaborate more, what's happening in the market? That's the first question. And the second question, in terms of the traditional trade and modern trade. So the growth was very strong in the traditional trade, however, the modern trade was not that strong, what are you assuming that in this channel, is it consumer are shopping less in the baqalas? Or are you seeing some of the baqalas closing?

Maybe Ikram, you can take care of the modern trade, traditional trade question. And Ikram -- Majed, if you can help us on the milk situation?

Yes.

Yes. Look, coming back to it, maybe you switch the channels because modern trade -- if you go to Slide 14, modern trade is up 16% and traditional trade is only up 4%, but the question was phrased the other way around, just to be super sure, right? Because modern trade is experiencing a much...

Yes. It's there.

Correct. Yes, traditional is lower, mainly, as we said, look, majority of the focus, especially on the Food side, Long Life Dairy and what has happened for the last 3 or 4 weeks, people are shopping more and more into bigger shops, like I'm talking of Carrefour, Othaim, Panda those places. And that's one of the main reasons the modern trade has experienced much higher growth. Traditional trade is not falling behind. It's doing very well. But still traditional trade is more than half of our revenue, and it's still growing at 4% plus, so it's still doing quite well. But just the pressure of -- the type of the product, which have sold in Q1, majority of that is actually sold in modern trade. If you think from your own grocery purchasing as well, most of the monthly buying that you do for food and other places will be done through like the bigger shops, and you will buy them on promotions and things like this. This is the reason why modern trade also has grown quite significantly during the quarter. Majed, if you can talk about the milk oversupply?

Yes. I think -- to highlight, as you know, Saudi is head of many neighboring markets in term of the investment in Dairy and the production of milk, and this goes back to more than 40 years ago to the direction that has been taken. Over the years, there has been constant investment in producing and increasing the local capability. And that was up to 2015 when we have experienced a little bit of market stability and probably reduction on certain consumption categories for quite some time. So that has led into the surplus milk, which traditionally, all of the producers of fresh milk, us, Nadec, Al Safi, use long life as a balancing element. So at the end of the day, milk is milk, the liter is the liter, that's either sold in fresh or long life. So in order to manage this surplus, you get more -- deeper promotion activities. And it's not cheap because it's putting pressure on the margin. So we hope over the period when we get back to growth and probably increase in consumption that this surplus becomes less of a pressure and bigger of a benefit.

But are you currently seeing oversupply in the market?

It's UHT normally because you cannot sell more fresh, fresh is 5 to 10 days, and you cannot push more. The only channel that you push through, and you could see that on promo, majority of the time is the Long Life Milk. The Long Life Milk has probably 9-month shelf life. So it allows any producer to sit on that for some time and then aggressively price or discount. But what I can assure you that no one is dumping milk because this is where you basically lose a lot. The only thing as you use it in UHT.

Okay. And just one other question in terms of the food security. We envision that some of the subsidies, policies and farming of alfalfa, et cetera, will be reversed. Given that is now post...

Of course, if I want to be -- this is an opinion, this is -- it's a government decision, it's not a company decision. You know enterprise sector. This is the call of the government to assess the situation and how they respond to the situation. We are not aware of any such direction. And we are not making any of our plans on restatement of subsidy. We are working on maximizing our efficiencies, looking at our opportunities, growing back our categories, we will calibrate the category rather than wait for subsidy to come back to the table.

Operator, if we can ask to have the last 2 question, as we're getting close to...

We'll now take our next question.

This is Franck Nowak from Franklin Templeton. I think most have been answered, just the last one. On -- again, sorry if I sound like a broken record, but on the working capital, there's been obviously a lot of cash consumption for you with barely a month of crisis. And I know you said you had plans in place to preserve liquidity. I was wondering if you could comment on the strategy and the details. I thought you had some lines in place that were undrawn, maybe an update on that would be useful.

Okay. So thank you for the question. I think when you look at our financing setup as we speak today, we have almost SAR 6.1 billion available, out of which SAR 2.7 billion is committed lines that we are keeping safe. So we have not tapped our more secure source of fund of SAR 2.7 billion. And of course, we are protecting that as long as we can -- don't need it on the noncommitted line, which today are pretty well in place. We are using approximately 65% of those. So we still have headroom in our noncommitted existing line. The plans I was referring to, this is the situation as of today. Of course, we have been talking to our financing partners and our banks to eventually strengthen and give us more opportunity going forward to have more access to additional committed lines or additional source of fund. It's too early in this phone call to give you more detail. But I just want to give you a sense of safety. As of today, we have plenty ample capacity available now. And we are working and my successor will be working with our partner, who are ready and willing to work with us to protect us and guarantee our liquidity in case of mix.

Okay. So yes, so you -- because I think our discussions in the past where you were willing to cover CapEx, any maturity that's coming for like the next 12 to 18 months, which I think is also important for your IG rating, is that still in this period? Or you feel you could go into more and more like distressed environment and different plans was what I wanted to know?

No, no, we are not yet -- we have not reached distress at all. We are -- on the contrary, I think we keep to our plan. We have funding plan for the next month -- years to come, and we are facing the maturity ahead of us. We are developing plan, again, too early to say or eventually rolling forward some maturity that will come in the future and extend them longer, and we are working to have alternate source of funds, of course, competitively, if needed. So it's all I can say on this phone call because nothing has been yet finalized. But we have enough. For the very short term, we're absolutely safe. And going forward, I'm sure there will be a safe plan unfolding.

And sorry, in the beginning, you mentioned about the increase in working capital, and it's early days. But as Paul mentioned before, SAR 100 million of it was received from the government just 2 days after the quarter closing. So we already are unwinding and seeing the results of the working capital expansion is already coming under control. SAR 50 million of that was normally prepayment stuff that we made deliberately. And usually Q1, seasonally, for the last 4 years, you would have seen in Almarai, I would say about SAR 300 million is a seasonal increase in working capital. So the true increase was about SAR 120 million to SAR 150 million, which is in line with the growth we have seen in the modern trade. Because modern trade growth, virtually all of it comes on credit, and that has been the biggest contributor of revenue for the quarter as well. So if you go through each of the sources of why the working capital went up, you'll realize that how we can get back to normal conditions very fast.

Thank you, Ikram. Can we move on to the next question, please?

Yes. We will now take our final question.

Just touching base again on the question regarding modern trade and why it's grown. I understand Ikram's point, but maybe if you could just -- because people are shopping in supermarkets. Just wanted to understand is that -- you didn't see any stores closure as in baqala closures or anything like that, which led to lower growth at the traditional trade level?

Ikram, you want to pick that one.

[ Adnan ] , your question is that traditional trade is lower than...

Can I pick it up?

Yes, please. Yes.

So there has been no closure in the traditional trade. Traditional trade, we have not seen any change in traditional trade. However, the behaviors of consumers with less frequent visit will make them go to modern trade rather than traditional trade. But we have seen increase in both. And I think that will continue the pattern for some time. But it's not a permanent shift in our assessment. The traditional trade is a category that's convenient into the major markets we operate. And currently, due to the current situation, some people would like to do less visits out. So they will go to supermarkets where they can have a bigger variety. So -- but in a way, we have seen growth in modern trade, we have seen growth in traditional trade and I think this is part of the challenges of predictions and the certainties or uncertainties around how long -- how often -- what would continue changing.

Okay. Understood. And one last bit. In terms of foodservices/HORECA, what percentage of the total revenue is presented, if you can talk about it segment-wise or total, I leave it to you.

HORECA represents around 12% of the business.

I would like to close the call with a final comment, if I may, to all of you. As you've seen for the first quarter 2020, Almarai core segment that demonstrated top line growth driven mainly by Food, Long Life Dairy and Poultry. However, weakness in the GCC juice market or sugar tax implementation continue to be a challenge. The cost pressures on high feed costs, reformulated juice, [ receipt ] cost, higher payroll costs due to higher staff and expat levy costs and expected credit losses arising from the COVID-19 pandemic continue to impact from profit growth. But however, realize economy of scales, we have positive sales growth, lower depreciation as a result of lower capital expansion and lower funding cost due to lower debt and lower rate is driving a positive net income contribution. And I believe that the crisis management processes and tools in place will help the company face the uncertainty ahead of us. The focus will remain on the safety and health of [ our ] employees, the continued supply of quality product to the consumers with a particular focus on operating simplification and cash preservation. As it is my last quarterly presentation for Almarai because I'll be stepping down, I would like to thank you, first, thank the Board, the management and the shareholder investor base. And especially the people on the call for their support, and I'm looking forward for you to continue with Danko in the future, and I would like to wish you a very good day. Thank you.

Thank you, Paul. Thank you.

Thank you.

Thank you.

I will now hand the call over to Nauman for closing remarks.

Thank you, Paul, for your time with Almarai, and then we also thank the Almarai management for this call and provide a vital insight in these uncertain times. Thank you very much.

Thank you.

Thank you, Nauman.

Thank you.