Almarai Company (2280) Earnings Call Transcript & Summary

Ladies and gentlemen, the Almarai Q2 '20 Results Call is now underway. My name is Adam, and I'll be the operator for today's call. [Operator Instructions] I will now hand over to your host, Nada, to begin. Nada, please go ahead.

Thank you, Adam. Hi, everyone. This is Nada Amin from EFG Hermes. I'm part of the Consumer and Health Care team. And as always, it's our great pleasure to be hosting Almarai's second quarter results call. On the line from the company's management today, we have Mr. Danko Maras, the company's CFO; as well as Mr. Ikram Ulhaque, the company's Head of Finance. They'll begin with a presentation. You should have received a copy of it. If not, feel free to reach out. And then they'll open the floor to Q&A after that. Please go ahead, gentlemen.

Okay. So good morning or good afternoon, ladies and gentlemen. Welcome to the Almarai earnings conference call for the second quarter 2020, organized, as you know, by EFG Hermes. Thank you to Nada Amin for arranging this call. I am Danko Maras, the new CFO of Almarai. And I'm also joined by Ikram Ulhaque, our Head of Finance, as you know. And we are going to do today's presentation, which is available on our website. If you go to Corporate, Investors, Earnings Presentations and download, you'll find the material. Given there is no webcast but only talking, then I would be very specific and distinct. I'll try to be very distinct in terms of the page numbering so that you know which page I'm referring to. So without further ado, let's get right into it and starting with the market dynamics that you see on Page 4. Just wanted to highlight the picture on ALYOUM table eggs that you see in the background. We've launched high-quality Class A table eggs in the quarter as a means to respond to the market shortage that appeared, and we're currently piloting further expansion in the area. So it's very exciting for us to see how this progresses. If I move on to Page 5 and our response to the COVID-19 pandemic. First and foremost, it's about the safety of our consumers and our employees; and secondly, it's to secure availability of our products on the shelf. Our commitment to these 2 and the quality you can trust is an integral part of our nation's food security and captures a wider responsibility than just selling products. From a people safety point of view, we have continued the initiatives we started in Q1. All our noncritical staff are working from home since 16th of March. And we've set up our IT and connectivity tools, and it's working excellent to support the new way of working. I think we all are benefiting from this digital revolution, probably also on your end. We've also created a more agile and flexible operating model to ensure that the continuance of our supply and services are ongoing. It has proven to be successful in a period of restriction of movement that I'm sure you're all aware of. All our production sites, sales depots and offices have proactively implemented all government guidelines. Given the nature of our business with inherent risk on biosecurity issues, we were very quick in setting both farms and factories in a lockdown state. And we continue to operate under this setting ongoing to secure the health and safety of our people and consumers and to make sure that the product is available for you to buy. If I go to Page 6, the scenario planning on the development. Here, you can see that we are living in a time of uncertainty, and Almarai is no exception to others in trying to predict what's going to happen in the future. So within our team, we have worked a lot on developing different scenarios. Some of them are already obsolete. I would say, a resurgent economic -- economy or #3 there on the top right side. I don't think that's reasonable to assume that this will be a case for us in the near future. We are more looking into scenarios that are building on economies in recession or late recovery. So we specifically look at the speed of recovery from COVID-19 and the economic recovery and the impacts, what that will mean for Almarai. If we take the economics that we are all exposed to, I think it's safe to say that we will see a prolonged GDP stagnation. We will see an impact on consuming. We will see high unemployment and fewer exports in the region. We will see a restriction in terms of travel and tourism and so forth. A lot of economic indicators that I'm sure you all get research on, which boils down to 2 key issues for Almarai. One, disposable income is going to be less, most likely. With the fiscal austerity measures that the government is doing, it becomes very, very clear to us. And the other one is a population decline, and there are some researchers giving us indications that the region will be last in population with about 3 million to 4 million next year. So as you will hear from me, we've had a really good start of the year, first and second half, if we look at the performance of Almarai. But we are also now preparing for a somewhat more grim scenario going forward. And we need to make sure that Almarai caters to that in both the cost structure but also on the top line to make sure that we have consumer offerings with value packs that it will appeal to people with less disposable income and so forth. Also quite some stir, we think, in the industry will happen with many companies might having financial distress. So that scenario is something we are building on and preparing ourselves for. And even if it were not to happen, which we find more and more unlikely, Almarai will be in a much better position as we are going through these corrections that we're doing in our P&L. So if we then leave that and move to Slide 7 of the presentation, we have provided you the most recent market share data dated May 2020. And you can note there that Almarai has remained the #1 choice for the consumers in all categories with the exception of UHT milk, where we are holding a #2 position. And rest assured, we would like to be #1 in that position as well. If I now leave the market dynamics and move into business performance. Let's move to Page 9, where you see some financial highlights. Revenue growth of 8% in the quarter, spearheaded by Foods, Poultry and Long Life Dairy, which I will come back to in the following pages. Operating profit increased by 2% to SAR 759 million, a lower rate than revenue growth due to higher feed cost that you all know that you have heard from us before. We are phasing that in. It's imported alfalfa. We have additional juice ingredient costs that we take out on pricing, but it's actually having an effect on our cost base. We have higher labor costs driven by COVID-19 and also a structural expat levy change that we are phasing in. We also had some higher trade support cost due to the shift in our channels, and I'll come more into that in a second. If you look at net income, we grew 11%. Revenue, 8%, net income, 11%, and that's a good one. We grew to SAR 644 million, mainly due to lower financing costs coming from both lower interest cost and lower debt and a deconsolidation effect by excluding minority shares. Working capital increased to SAR 3.171 billion due to higher inventories driven by stock buildup, and that's also safety stock to the COVID-19 position and also higher trade receivables from the expansion into modern trade. As you know, traditional trade is on a cash basis, but modern trade is on a credit term basis, and that has had an effect for us. On CapEx, as we have previously communicated, we continue to trend lower. CapEx spend for the current quarter stands at SAR 252 million, a reduction of SAR 125 million versus last year's quarter 2. And finally, the free cash flow almost doubled in the quarter to SAR 1.1 billion, an improvement of SAR 0.5 billion over last year's free cash flow of SAR 0.6 billion, driven by control in CapEx spend, the actual business generation of cash and the fact that we didn't have any particular M&A structural investments in the quarter, but a very comforting cash flow generation if we look at it in the quarter. If I move over to the sales bridge on Page 10, you may see the overall 8.4% driven by volume, and that's a good thing. About 6.8% of the 8.4% is volume-related growth, and that comes primarily from Food, Poultry and Long Life Dairy. Just a second. Thank you. So the price variance is 0.9% plus, and that's coming from the price increases we have done on Juice. We also have a positive mix of about 8.8% mainly because of channel shift and product mix shift in Poultry and Long Life Dairy. We have a positive currency variance of 50 basis [Audio Gap] Have in the quarter comes from Others, which is Premier Foods predominantly, given that their channel is foodservice, and there's been an impact in the quarter. Moving over to the next 3, 4 slides on Page 11. I will talk about the different dimensions, countries, product categories and channels from where the growth comes from, the SAR 317 million or the 8.4%. As you see from the chart, the Almarai revenue growth was driven by KSA, Egypt, Jordan and Kuwait. Contraction in sales occurred in Oman due to heavy competition from local dairy production. Bahrain and UAE recorded lower sales due to lower tourism driven by the travel ban and also the subdued impact of the Ramadan season due to the reduced social activities that we have. Kuwait and other GCC countries recorded a double-digit growth driven by Foods and Poultry, and Egypt and Jordan remains very strong at double-digit growth. If I move to Page 12, it's just a reflection of what I just said. I'll leave that to your discretion to look at. And perhaps I'll go into the category, and that's on Page 13. If you look at the right-hand side, you see the respective product category growth spearheaded again by Foods with SAR 117 million; Poultry, SAR 87 million; and Long Life Dairy at SAR 63 million. So all 3 product categories recorded double-digit growth year-on-year and accounted for about 84% of the total growth. Food being 37% of the total growth; Poultry, 27%; and dairy, about 20% of the growth. Fruit Juice being the only one in the red, driven by higher pricing post implementation of the sugar tax. You see the negative 3%. If you look at it year-to-date, we are actually flat, but we had an impact in the second quarter. And we are, of course, working on trying to make sure that we come into the good numbers on Fruit Juice as well. Moving on to Page 14. Traditional trade channels -- sorry, channel growth. If you look at the right side, again, you can see a significant increase led by traditional trade at 15% growth or SAR 320 million, about SAR 119 million from the modern trade and a negative growth of about SAR 147 million or 37% negative in foodservice. Here, we have some interesting dynamics following the effects that the government announced on the curfew. Maybe I should spend a second on that one. The last 2 weeks in March, we saw a significant buying in modern trade, which we refer to as a sort of a panic-buying mode, given that the curfew was introduced. So we had a significant swing into modern trade in the last 2 weeks. Then if you recall, there were some additional restrictions imposed on us that we could only move within the vicinity of our living area, which meant that we saw a downswing on sales in modern trade and an upswing in traditional trade, which is where we have most of our outlets, very close to the vicinity of people's home. So that has been the key driver for the growth that we've seen in traditional trade that the curfew has actually not allowed additional growth in modern trade. Foodservice essentially collapsed when we had the curfews being introduced and have had a negative impact of this COVID-19 situation ever since. But what's interesting here is that in the last period of the second quarter, we started to see an upswing coming again in foodservice. And that's not necessarily because they are opening the restaurants. It was more about the online delivery from very popular restaurants has increased significantly so that we are now delivering our products to restaurants and foodservice channels who are then, in turn, picking up online orders and delivering them to consumers. So somewhat of a new trend in the area. We are still having a very negative impact on foodservice until the whole curfew, which has been lifted, but the social distancing is still impacting our foodservice channel. And it remains to see -- to be seen what the complete lift in KSA means to the business going forward. The next 2 slides, Page 15 and 16, is also just a summary of what I've mentioned to you so far. So I'm going to leave that in the interest of time. And then we just end up with a comment on Almarai and ESG and ESG rating on Page 17. The chart highlights the most recent environmental, social and governance rating given to us by ESG Invest. It's a busy chart. But if you look at it, you can see on the right-hand chart side that the yellow bar indicates the local sector average. And the color on the left side of each bar indicates Almarai's score. You can see that Almarai's scores are high in all parameters, except the last one, which is Board of Directors, and that has to do with gender equality to achieve best-in-class. So we have to work on all of them, but this one, in particular, going forward, to make sure that we are not only above the local sector average but also that we are able to compete with world best practices. So we are pleased to see the rating coming through, but there's a lot of work for us to do to continue to drive this area forward. And it's an important strategic pillar for Almarai going forward, as many other areas are, but we are looking at this, of course. So with that, I leave a little bit the business context in the quarter and the first half year. And I'll let Ikram take over and talk a little bit more in detail on the financial performance. Ikram?

Thank you very much, Danko. So ladies and gentlemen, if I can request you to move to the next section, and let's go straight to Page 19. The next 3 slides is about the financial performance of the Q2. It's not Q2 year-to-date, but only for the quarter, and I'll talk on that in more detail. So let's go straight to Page 19. Page 19, the first bar is about revenue growth of 8.4%. But I believe Danko has talked in a lot of detail, as you heard him before. So let me talk about the last 2 bars, which is about the operating profit growth and the net income growth. So operating profit is up 2.3%, which is positive, but it's lower than the revenue growth of 8.4%, and there are 4 or 5 major issues, which are the higher cost of imported alfalfa; the higher cost of Juice ingredients, which we are selling at a higher price now as well; higher labor costs, mainly due to the impact of COVID-19 as well as export levy; higher losses in Premier Foods, which is our foodservice supplier; and the higher depreciation and higher cost, in general, in Egypt operations, which is impacting a lot in the IDJ part. So the last part is about net income, which is up by around 11%, and that's mainly due to lower funding costs, both because of lower debt levels, and we'll talk on that later on; as well as lower interest rates, as you guys have seen in the past as well. The other major impact is coming from a positive NCI, the noncontrolling interest. That's mainly because of higher losses in IDJ mainly driven by Egypt because we capitalized a major portion of our CapEx in Q4 2019. If I can go to the next slide, which is Slide #20, which is about the segment issues. I will focus on the growth numbers, and hopefully, that will help us tell the whole story. If you look at the boxes in the middle of the page, which are highlighted in green, the top box is about growth by segment in the revenue. The bottom half is about growth in net income by segment. So I'll discuss one by one for each. So the first one is Dairy & Juice. If you look at the very first box, the revenue growth is 7%. If you look at the bottom area where the income growth is only 5% for the segment. Why is that? Mainly, you heard this thing before from us, higher alfalfa, juice cost, labor and high depreciation and losses mainly coming from IDJ, which is pretty much the things we've spoken -- or heard from us before. The second one is Bakery. The top line growth is 8%, but the profit growth is 46%. This is because the fixed cost leverage is assisting this segment back to our normalized EBIT and a normalized marketing spend compared to last year. We ran a few very major campaigns in Q2 last year. So we're coming back to a normalized marketing spend. The Bakery segment is now reporting a 9% net income margin, which is more reflective of its historical as well as future trends. The third and the most exciting one is the Poultry. Now the revenue growth is 17%, and the profit growth is 51%. So let us go through that in a bit more detail in this segment. The 17% growth in revenue is built upon a volume growth of just about 2% to 3%. The top line growth is driven by a major shift in the channel mix. What happened, as Danko spoke about the mix in the channels before, the foodservice sector virtually collapsed in Q2. In Poultry segment, 50% of the volume was going towards foodservice in Q2 2019. In Q2 2020, only about 30% of the volume are sold to foodservice's channel. The shift of 20% more volume, which is mainly going to retail sector, resulted in significant revenue growth. Now because of this revenue growth, even after you adjust for a higher trade support cost to support the revenue growth in modern trade and traditional trade, we have pretty much a fixed cost structure in Poultry because we are reaching full capacity. So the cost structure was very close to the maximum. Revenue growth came in. Majority of it went to the bottom line, and that's why the bottom line growth is around 51%, and that's the key growth factor here. If I can request you all to move to Slide #21. This is about the net income contribution for the quarter by each segment. And all segments -- I'm very happy to report that all segments have a robust growth except for the Others segment, and I'll touch base on that separately. The biggest contributor is Poultry, which is contributing SAR 42 million or close to 17% of the total income growth for Almarai. It was followed by Dairy & Juice with SAR 22 million, and Bakery with SAR 12 million. The key point I want discuss on this slide is the Others segment. Others segment reported a SAR 15 million higher losses than last year, mainly due to Premier Foods. This is a subsidiary that we purchased in Q2 last year. And as we talked before, foodservices suffered significant reduction in Q2. Premier Foods basically is a supplier of processed food to the foodservice sector. So it followed the same trend. The reduction in revenue was very similar, and this is why the losses were very steep in Premier Foods in Q2. Although we have started to see some recovery at the last couple of weeks, the quarter was quite significantly worse off for Premier Foods. If we can now move to the next section, which is about CapEx, cash flow management. I'll go straight to Slide #23, which is about the CapEx trend. As you can see on the slide from the year 2015, 2016, when we were spending 30% of our top line into our CapEx investment cycle, now it's coming to a more normalized trend. On the trailing -- on the rolling 12-month basis, we're now close to 8%, and we expect that to continue. The downward trend will continue as the new CapEx remains on hold, and we are simply completing the project which is already in our CapEx pipeline. If we go to Slide 24, exciting slide on the free cash flows. We recorded a very healthy cash flow performance for the last 12 months. Our free cash flow is now running at SAR 2.9 billion. Now keep in mind the 2019 free cash flow was SAR 2.6 billion. So we reached the halfway mark, and we're running ahead of the curve already. The strong free cash flow is contributed mainly by control in the CapEx spend, as we discussed previously, and the higher operating cash flow in line with the top line growth. The other 2 bars that could be of significance, if you look at this chart, is the reduction in net debt by about SAR 1.3 billion, so just shows you how much of the debt is coming down; and the SAR 0.9 billion in dividends that we're paying to our shareholders, some of whom I'm hoping are on the call as well. I want to reiterate the -- our management commitment that we expect the free cash flow to move towards our 2020 free cash flow target of SAR 3 billion plus. We're already at SAR 2.9 billion, and we expect the trend to continue. Slide #25, there are 2 major trends on this page. On the left-hand side is the downward trend in net debt. The strong free cash flow that we just discussed is supporting the net debt to continue to come down. Currently, net debt is SAR 12.1 billion, debt-to-equity is 80%, and net debt-to-EBITDA is 3 -- is at 3. We remain on track to achieve a ratio of 2.5 to 2.75 net debt-to-EBITDA over the next 12 to 18 months based on lower CapEx spend and increased operating cash flow. Danko will further address this point in the later slides as well. The right-hand side chart is about the profitability trends. EBITDA and EBIT percentage are running at 27% and 16% -- or 17%, respectively, reduced from last year because the growth in the top line has not resulted in growth in the EBIT and EBITDA percentage line due to cost increases that we just talked before. Next is more about the debt profile, Slide #26, please. If you look at the right-hand side of the page, you would realize Almarai's debt profile highlights the growing share of sukuk in our debt program. It's about 28% of our total debt. Banking line forward continues to be the most significant contributor, the biggest one at 51%, followed by government and semi-government institution of 22%. Our average tenure remains at 4.1. But the key point here is on the left-hand side. The level of gross repayment each year are now in line with the free cash flow generation, as you have seen on previous slides results. With this, I would like to request to Danko to take us through the rest of the presentation, starting from Slide #27.

Thank you very much, Ikram, for that. And as I understand it, we have both equity investors and fixed income. So I thought I would again highlight the point in terms of liquidity and our financial strength. As you all know, we have a strong investment grade currently, and I think we are trailing towards a good leverage position. We see no clouds currently in -- ahead of us in order not to be able to deliver what we set out to do. We've done successful refinancing in the end of first quarter with our sukuk. And also, we managed to do the dividend payment of SAR 850 million and still generate positive cash flow in the quarter, which for me is a strong sign of strength for Almarai, without a doubt. That said, we have taken some precautionary measures, if, in the very early stage of this. We increased our cash on hand to be able to be flexible in case there would be a need, in case we would have sudden moves or unanticipated scenarios that would affect Almarai. We haven't really seen that happening since we started to do this at the end of the first quarter. But for those of you who wonder why we have a bit higher cash position, it simply is a contingency measure on our side. We have arranged, and if we look at the rest of the year, Almarai does not need to borrow anything at the end of the day. We are self-generating in our cash so that we now have cash flows that are positive organically, and we are holding that position until year-end. Of course, we are watching our receivables carefully, but they are still moving well in line with plan, especially on the foodservice side. We have weekly monitoring, making sure that those -- that we are actually selling to or are in business that they are actually able to pay us in the end. We are less concerned with the modern trade, given that you have very established retailers and customers who are doing the business there. In case the opportunity would come, we have significant backup facilities, SAR 2.7 billion in the committed line and SAR 2.2 billion in uncommitted line. So with that in place, we are in a resilient category. Consumers need to eat and drink. We feel very comfortable with our liquidity management at the moment. And we don't have any strains in terms of our cash flow going forward. And as you can see in the numbers, on the comp rate, actually it was a very strong delivery of cash in the quarter. So that's the debt side of it. If I move to the -- Page 28, I'm not going to talk too much about share data. That's not for me to talk about. It's our task to make sure that we maximize the value, and that's reflected in the share. So I leave that at your discretion to look at and see where we are. And instead, I'll move straight into, let's say, the last 2 slides before we take Q&A. So let me just summarize the key takeaways for the quarter. I mean, top line performance remains very strong, both Q1 and Q2. So first half is good because of the diversity of the product range and strong channel base and strong brand equity, I would say. People had a flight to security and quality. Gross profit remains under stress. Some structural changes in alfalfa. We also have COVID-19-related cost pressure that we need to deal with. That's partly offset by changes in product and channel mix, that gives us a benefit. Cost control remains strict, but COVID-19-related expenditure resulted in additional operational expenses. Our net income follows positive revenue trends as these additional costs that we have to deal with are offset with good, strict control on both CapEx and costs, further assisted by lower financing costs, so that the net income actually grew more than revenues. Very nice to see Poultry. We -- all our categories are our favorite categories, Ikram. So the Poultry segment, it's great to see the contribution on both top line and profit growth, and we expect the same trend to continue. The foodservice channel it's difficult to tell how that will evolve. We will see how the social distancing will develop and how restaurants will open up, and hope that retail channel will rebound. Cash flow generation remains strong and liquidity and funding plans firmly in place to manage the current environment. And then if we move over to the last slide on Page 31, key challenges and opportunities. The new VAT effective from 1st of July, we passed that along, about 80% of our portfolio. We have no intent to make money out of this interception from the government in terms of the VAT, but we want to pass it along to the consumer. That's the whole point with value-added taxes, that it should flow all the way through to the end consumer. So we are making those changes from the 1st of July. The lifting of the curfew and opening of all activities from 1st -- 21st of June has generated a positive momentum in the market. But it's sort of subdued there now by the effects of the VAT. But we will have an offsetting impact in the short term. So we saw some trade-loading towards the end of June and then an impact and in the beginning of July, which will be indifferent, I think, in -- if you look at it on a rolling 12 months basis. But then the impact on volume, it's too early to say. So we will come back on that. And we will have to be a bit mindful about how the market will develop going forward. It's going to be an interesting period here over the summer. We know that we have to work on structural efficiencies and deal with pricing in terms of subsidy phase-out for dairy products by the end of 2020, and that's work that's ongoing and important for us to keep an eye on and focus on going forward. You are aware of the import duties that came into play, I believe, on the 20th of June. The direct impact for Almarai is minimal. We would now rather say that it opens up for opportunities in our vertically integrated business, especially on the Fresh Dairy range, Labneh, evaporated milk and sterilized cream; and also strengthening our locally produced Poultry range because importing poultry now has an import duty levy, which is quite significant. So if anything, we see competitive advantages with this. But obviously, also, there are knock-on effects on our suppliers that we are buying from that will have to apply the import duties now if they're importing from abroad. So we'll have to also continue. We've done a first scan and seen that the impact directly is not very material from a cost point of view. But we need to look at the knock-on effects and what that will mean for us going forward. And finally, to end up, at the end of the day, cash generation continues at a strong pace, remains on track to deliver our objectives. As a result, balance sheet will be further strengthened to absorb potential acquisitions. If the right thing comes along and it makes strategic sense, then we would have the war chest to initiate that kind of activity. And hopefully, we will find that going forward. So with that, I thought I would actually stop and leave the floor for Q&A.

[Operator Instructions] We have our first question is from Duaa AlFadda from Riyad Capital.

This is Duaa AlFadda from Riyad Capital. My question is regarding Long Life Milk. So we've seen consumers preferring products with longer shelf life. What's the -- is there a plan in regards to the Long Life Milk? And regarding pricing, if you may?

Well, this is Danko here. Thank you for the question. And as you saw in terms of the markets, we are #2 in that market. Strategically, obviously, we are interested in also taking a leadership position in this area as well. We have seen a consumer trend shift in the last 4 months, whereby long-life products have become more desired by the consumer simply because fresh is not a product that you stock up. You need to consume it. So it's an important component that you just have to live with in terms of the shelf life. But clearly, the consumer has had a trend towards more long-life products per se. Long Life Milk, we have all the capabilities in-house to produce high-quality, long-life milk. And we need to, of course, focus more on the area. But it's a key focus for us. And I don't know if you want to add anything to that, Ikram, in terms of the response.

No. Danko, I think you have covered it. The only thing on the pricing, I would say, the major impact or the major trend we saw in this quarter is the lowering of promotions that you would have seen in April, May, especially starting at Ramadan. Ramadan used to be a month where you will see very steep and big promotions across the board. Given what was happening with coronavirus and the supply chain disruptions, the level of promotion was much lower. The effective pricing was a lot higher compared to the same quarter last year or I will even say at the beginning of the year as well. So that was definitely the change in pricing. And the preference that people are taking towards Long Life Dairy, we saw it mainly in earlier in the quarter. Because at that time, nobody was sure whether shops remain open or not. Sometimes the lower -- the Bakala close to the -- to your house will be open, and then it will close. So we saw a lot of disruption in the channel. And people were preferring a Long Life Dairy and Juice -- or sorry, long-life food option, mainly because of security of supply issue. I would recommend that let's just wait and see for the next 1 or 2 quarters to see if they are long-term trends or they were trends that people opted for because of the curfew situation.

So should we expect this normalized level of promotions to sustain? Or we might get back to higher promotions?

I think again -- Danko here. I think what you saw in the very beginning here was securing availability on shelf was an important component for us. And therefore, we took away part of the promotional activities to ensure that we had the ability to distribute around the country and also ensure that people are not buying more than what was needed. That will come back more to a normalized pace. There are some products where promotion is key, and long life is no exception. So we have to support our sales with promotional activities every now and then. So it will be coming back to more normal activities going forward. And the reduction that we saw was not necessarily a trend break for us. We need to do promotions. We are in that kind of fast-moving consumer goods business that we need to do it.

We have another question. This one is from Taher Safieddine from JPMorgan.

It's Taher from JPMorgan. A couple of questions from my end. First, I mean, very solid performance again, and really, congratulations. But I just want to get some color on where are we in terms of utilization rates? I understand you're at full capacities. So I mean how far can we go on that front? And number two, Ikram, you mentioned that there was a huge impact on mix, which is mainly pricing versus volume this quarter. How do you expect this to pan out through the rest of the year, primarily in the second half? Is there any competitive pressures in the -- I mean, in the product that you're seeing? So that's one on the Poultry. And number two, on the fresh milk. Just from the slide, it looks like your value share has come down between December '19 and May '20. Can we just get some idea on how the dynamics are there in the fresh milk category? And I'll leave it there.

So Danko, if I can just answer the number one. So I'll start with the Poultry question, Taher. Thanks very much. So the utilization rate, supply currently, the number of birds sold in Q2 is about 47 million birds. And if you annualize that, you'll get very close to the 200 million birds that we've been talking about. So expect that we're running very close to full capacity. We can increase it by, let's say, 3 million to 5 million birds per quarter extra. And that's something we will continue to see, depending on the demand, how that goes through. How the future holds and will the mix continue or not? And that's -- we will see as the market is opening up. One thing I would like to stress here again, Q2 was perhaps super exceptional. But even Q1 performance, if you've seen how Poultry was improving. We put the process up back in week 1 of the year for the foodservice channel as well. What's happening in the market and with the supply of quality chicken remains in big demand. Our prices have already gone up on week 1. So the whole year, if nothing would have changed, the extra SAR 1 price increase we had in foodservices would have given us a huge benefit regardless of the channel shift. What has happened it's just exaggerated the whole effect by a much bigger percentage. As I said, today, we are selling close to 1/3 of our volume in foodservices. Maybe it will shift back to, let's say, 2/5 or 40% or 45%. So you will see a bit of shift in Q3. But year-on-year, you will still see a very positive impact. We will still be selling slightly more in retail. And whatever we sell in foodservice, we'll be selling at a higher price. So expect that trend to continue. By the Q1 or, let's say, end of Q1 2021, expect extra capacity to come on board. We'll have close to 30 million to 40 million birds that will come on board. So that will help us with the additional volume growth, let's say, in most of the year 2021. So as you will go through the next 3 or 4 quarters, expect additional profit growth driven by either price increase or by channel mix by the time we hit, let's say, Q1 or Q2 next year. And then the volume will still start to kick in as well. So you expect the cycle to, I guess, continue for the next 2 to even 4 to 5 years as well as we continue this journey. So that's the utilization rate and that's how we're running now. In terms of fresh milk…

Sorry. Can we get some color on the margins, EBIT margins? I know you've guided to, I mean, some normalized EBIT margins. And clearly, things have been improving on the profitability. Is there something you can share in terms of where you are now in terms of the margin profile for the Poultry business?

So if I can revert back you to the earnings presentation, and if you go to Slide #20 and if you look at poultry -- if you look at the graph at the bottom of the page, look at the bottom left-hand side, for the Q2 2020 Poultry net income margin, EBIT margin will be, let's say, 1 or 2 percentages higher. It's already at 20%. So it tells you the category is already rushing ahead, running ahead of the curve in that sense. And probably the long-term margins will be close to, I would say, in the early 20 percentage. I know we thought that it would be difficult to achieve this number. But we are running -- this has happened very significantly in this quarter. Long-term trends, I will still stick to between 18% to 20% range. I think that's much more realistic as we go through. Coming back to fresh dairy. The market share that you're looking at, if you look at the KSA market share, you will see somebody running a promotion, that happens pre-June. And you will see a bit of reduction in April, then it comes back up in May. Long-term trend that we're seeing in the fresh milk category is still very much a straight line. We're not showing, let's say, the 12-month or 24-month trend lines. But ever since we dropped, let's say, 3 percentage points in July 2018, our market share has been very flattish, let's say, 62%, 63% in fresh milk alone. And that is continuing all the way through. You will see monthly disruptions, but yearly, on an MAT basis, it's very flattish. And the fresh dairy reduction you're looking…

Go ahead, please, Ikram. I'm sorry.

The fresh dairy reduction that we see on a total Almarai basis, we need to keep in mind what's happening in Oman with the Mazoon Dairy coming on board. They are taking, let's say, 20% market share. So we are losing a lot of fresh dairy, I guess, revenue contribution at Almarai level driven by Oman. If you look at on a country-by-country basis, we're doing very well. So I just want to stress this point. Sorry, Danko.

No, no, no. That was just also my point, that we're seeing a structural change in Oman that affects us. So we should keep that in mind. That doesn't mean that we shouldn't compete and make sure that we are in Oman and trying to do our part in terms of driving the Fresh Dairy component, and we will do so. But it's an impact on us quite significantly.

We have another question. This one is from Meera Reddy of SICO Bank.

This is Meera Reddy from SICO Bank. I just have a couple of questions. Just to go back on the Poultry segment. So now we see that probably a lot of Brazilian chicken, which is going to be imported into Saudi, could look cheaper because of the currency devaluation. So even despite the increase in the customs duty, it could be cheaper. So how do you expect to tackle this kind of competition? And also, my second question is regarding the Long Life segment. So we also saw a drop in the market share value for Almarai. Could you give us a sense of how this happened despite an increase in revenues for your second quarter?

Sorry. So Meera, just coming back to your questions. I'll start with the first question, which was Brazilian chicken. Today, if you go in the market today and if you're anywhere in Saudi, frozen chicken from Brazil is now selling at about SAR 12. It used to be sold at, let's say, SAR 9 or SAR 10, but it's now running at SAR 12. We are selling our chicken at about SAR 16. So we are enjoying a fresh-over-frozen premium of about, let's say, 20% to 30%, which is very similar across, I will say, the whole world. And that's perfectly normal for us. For us, I want to stress this point again and again. We, even at full capacity at 200 million birds, we are less than 20% of the total Saudi poultry market. Saudi Arabia alone consumes around 1.4 billion chicken every year. We, at full capacity, we've 200 million birds. And we're only talking about the retail market share. So our strength in this segment is very different. Brazilian chicken was there for the last 20-odd years, and it will remain there as well. We are not there -- we're not competing to the bottom of the pyramid, where we want to compete with them in the frozen category, where we will be forced to sell our chicken at SAR 11 or SAR 12. We want to remain in the retail category. We want to continue to sell the product, which is fresh at SAR 16, be at the premium. This chicken was alive 3, 4 days ago, running around in a farm. And that's the promise that we're giving to our consumers. It's not that it is imported out 3 months ago, and it's crossed the Seven Seas. So our value proposition is very different, and we are not there to compete with Brazilians directly. And that's the reason -- the only thing that is benefiting us, that's the price premium between frozen and fresh. That's the key part there. If it's between 30%, 40%, that's manageable. Nobody worries about it. 4 years ago, Brazilians were selling their chicken at, let's say, SAR 5 a kg. The people could buy 3 chicken -- 3 frozen chicken for the price of 1 fresh chicken. This was unsustainable. They were selling below cost. So this was causing a lot of issues. As long as the price remains around SAR 10, SAR 11 and the parity remains 30%, 40%, we are comfortable. And we're happy to grow at 4%, 5%. And you will see the impact on the bottom line. We'll keep on going up and up as you've seen this quarter. So that's the story on the chicken side. On the Long Life segment, when you talked about how we are growing so much and yet the market share adjustment is looking a slightly lower one. What happened, Long Life category, in general, grew a lot in this quarter. As we were talking before, and Danko addressed this point as well with the curfew timing with change and uncertainty, people wanted to have a supply of food in their homes. So the whole category did grow a lot. Part of our growth is also coming from sale in the Gulf markets as well. So Saudia has a very high market share in KSA, and that shows. But we have a very high market share in the Gulf countries. More than, I would say, 40% to 45% of our milk is sold in the Gulf countries of the Long Life Dairy. Whereas if you look at SADAFCO, it's less than 10%. So there is the revenue mix. We need to separate from the market share slides and understand where the key market shares are. Saudi, we will always be the number -- like we are #2, as of now, not always. I should stress that point again. But this is because of what was happening in Saudi because of the curfew situation. Hopefully, that answers…

Perhaps I should -- yes, let me just add a little bit more context on the Long Life segment. Let me reassure you that we are not complacent with the fact that even if we are growing well in that segment that we are not complacent about it. We need to grow more. It's a natural extension for us to have Fresh and Long Life in the Foods area. And as you know, there is a very attractive product category for us. It drives very healthy, good margins. You have to invest in the brand equity, but it's -- and you have to be innovative with the product launches that we do. But it's a key focus area for us. So strategically, we need to expand much more in making sure that we win in this segment. I do have to say, though, that a little bit what Ikram was highlighting, I saw some constraints at times in our production. We have to simplify the whole production planning to secure the availability in the shelf for our products. And to some extent, the Food category or the long-life products did suffer every now and then because of the Ramadan situation. So that, to me, was more of a short-term issue. I don't see it is a structural issue. And again, let me just reassure you, it's a key issue and key strategic focus area for us. Some of our competitors, they don't have the, let's say, the milk available, the milk balance issues. They just buy milk powder, while we are using our milk balance to make sure that we use the food production. So again, this is a strategic, relevant product category for us. We love that category. And we want to grow more than our competitors in it.

We have another question. This one is from Saul Rans of Morgan Stanley.

I have 2 questions, please. So the first one is that you had quite solid revenue growth in Egypt. But it looks like losses overall from IDJ have increased quite significantly in the quarter. So can you just give us a little bit more detail on what is particularly causing that, assuming the quite high level of losses? And what will be required in order for those losses to come down again? And that's my first question. And then secondly, you mentioned at the beginning of the presentation the eggs products. Can you just tell us what's the business model there? Are you just buying the eggs from a sort of third-party farming suppliers? Is that a tactical initiative? Or is it a product you intend to continue with in the long term? And if you are, what could be the sort of revenue potential in the long term for that category, please?

Well, let me start with your last question, if it's okay. And then maybe, Ikram, you can support on the profitability of Egypt. On the eggs side, it was -- you might recall, in Q1, we made an announcement that we take our societal role with great responsibility in the region. So we see ourself as a national food supplier. And the reality was that there was a shortage of eggs in the market -- table eggs, just traditional table eggs. And the question came to us whether we could supply that almost in an opportunistic way, whether we can provide that in that market. So we made very swift reviews on what could be done to bring in eggs. So we have imported high-quality, Class A eggs from a region around the Netherlands, Belgium, Germany. And we've established, let's say, the value chain and the distribution around that into KSA. And as you know, our distribution muscle is very big. So in a very easy way, we can do an extension of imported egg into our distribution and our depots and made them available across KSA very, very fast. But obviously, that also has some halo effects on the poultry category, the brand positioning we are having for poultry. It's a natural extension, in a way, if you look at the table eggs for us. So we are interested in exploring this further to make sure that we have the capacity to build internally within the region, the investment to actually create this organically rather than importing it. So the answer to your question is we responded opportunistically to a shortage in the market, and we felt we were obliged to make sure that there were eggs available today. It's a little bit better than it was a few months ago. But it's a very interesting category for us and a natural extension, I would say, into the Poultry category. Of course, we have to make sure that we can make good shareholder returns on it. So that work is ongoing at the moment, but very interesting for us. So with that, maybe we should go into Egypt. Do you want to take that, Ikram?

Sure. Sure, Danko. Thanks for that. So what happens, the losses in Egypt are mainly coming from the depreciation and from the operating expenses. The top line, as you see in the numbers, is not bad. We capitalized the major part of our expansion CapEx in Egypt in Q4 last year. And as a result of this, the depreciation is running a lot higher in that category. We have very big plans. We have big plans to make sure that we fill in the plant with additional volume. But what is happening as a result of a new plant coming on board but then having the issue with the COVID and other problems with it, with the devaluation and the market remaining stagnant, it is causing a structural change to the P&L, as we speak today. The losses were very similar in Q1 and Q2. We lost close to about SAR 90 million on a consolidated basis on a year-to-date basis, and it was pretty evenly split between Q1 and Q2, because they're coming mainly from depreciation. And as we review the business, and I think Danko and team is actually starting this Thursday as well. They are having longer-term discussion with the business on how do we turn around the business going forward. It's not cash losses. But nevertheless, we have built huge capacity. And how do we leverage that capacity in the model, that's the key thing. Danko, if you have anything else to say.

Well, my only reflection, if you're asking me, Egypt is a large market. I think it was 88 million people. I hear it's 100 million people. So there's a lot of mouths to feed, and we need to be in that market. But obviously, we also have to make sure that we are profitable in that market. But it's starting up with, I would say, with the partnership we have with Pepsi. It's an excellent relationship. We have a common agenda of making sure that we are driving profitable growth in Egypt and in IDJ. And there are clearly some short-term measures that we have to take to drive the profitability levels higher again. So that's the response I can give on Egypt.

We currently have no further questions. [Operator Instructions] We have a question from Mathew Menezes of Millennium.

Just wondering if you could quantify the kind of cost saving that came through in the second quarter on the back of government support? Is this something that we should think about as kind of raising the like-for-like cost growth into the second -- into the third quarter?

Thanks, Michael (sic) [ Mathew ]. The cost benefit was close to SAR 8 million to SAR 10 million in totality, including the reduction in the export levy and the deferment of the renewal piece as well. So add them together, it's slightly south of SAR 10 million. But yes, that was the benefit that came.

And that goes to 0 in the third quarter?

To -- look, part of it will be in gross profit and part will be in S&D, mainly because they are functional expenses, so people who are in the factory versus people who are in the sales. We expect probably a lower reduction, probably only SAR 4 million to SAR 5 million for Q3, and that will be it. And that will finish the savings cycle from the government. But we will wait and see, unless we see some more cash.

Okay. So if I just may take the word again, if there are no more questions. So let me just have a few reflective comments for you after this session. And thank you for all the questions and your interest, and I've seen a lot of questions coming directly to us. You're most welcome to come back to us and ask them. And there's no issue at all for us. But in summary, thank you, at the first half year, revenue growth is driven by growth in all our product segments, except Juice. Juice is flat if we look at it year-to-date. Whilst volume growth in the Gulf region remains weak due to lower tourism and competitive pressure, KSA, Jordan, Egypt and Kuwait has demonstrated significant growth. Strong top line growth resulted in profit growth in double [Audio Gap] additional savings by lower funding cost while not compromising on our potential financial flexibility if we would like to move ahead. And despite this resounding performance in the first half of the year, the next half year and maybe 2021, we believe will represent significant challenges for not only Almarai but in terms of the market. And you can see that in the introduction of VAT, additional customs duties, other sort of grants that are disappearing and expected general decline in population and disposable income. So we at Almarai are now developing multiple scenarios to manage these impacts. And we'll roll out additional plans during the year to ensure the supply of quality products to our consumers and customers who are there whilst we continue to drive for superior shareholder returns, which is a core task. So with that, I would like to close this earnings call. It was my first. I look forward to meeting you in person one day, hopefully. Otherwise, we'll do it this way. It was nice talking to you all. Thank you, Ikram, and thank you to you all. And with that, I close the call. Thank you very much. Goodbye.

Thank you, everyone, and thank you for your time.

Ladies and gentlemen, that does conclude today's call. You may now disconnect your lines.