Almarai Company (2280) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. This is Pratik, and on behalf of Al Rajhi Capital, it's my pleasure to invite you all to Almarai's Q3 2021 Earnings Conference Call. With me today on the call is Mr. Danko Maras, the Chief Financing Officer from Almarai. We also have with us, Mr. Ikram Ulhaque, the Finance Head. And now I will hand it over to Danko to take it forward from here. Over to you, Danko. Please go ahead.

Well, thank you very much. I hope you hear me well. Thank you, Mr. Pratik. And then good afternoon or good morning, ladies and gentlemen. Welcome to the Almarai earnings conference call for the third quarter of 2021, which is today being organized by Al Rajhi Capital. As he said, I'm Danko Maras, the Group CFO of Almarai. And I also have Ikram Ulhaque, our Head of Finance, with me today as well. I will assume that you've downloaded the Q3 '21 presentation slides from our website. In case you have not been able to do so, it's easy to find and just go to the website, corporate investors earnings presentation, and you'll find the documents there. If we just -- hopefully, you have it on screen, you will see it. So I will make some page references for those who are looking at screen. I assume you've all read the disclaimer that we have all the time, if I just continue to move page -- to the following page. I'll talk a little bit about market dynamics, business performance and some financial performance, of course, and then we do some Q&A after that. When it comes to the market dynamics and the pandemic, I think we are becoming more and more into what I would say is a start of a recovery. We see a huge decline in COVID-19 cases. But for us, with the products that we sell, the pandemic is definitely not over yet. So we are still following various initiatives to ensure that we have continuity of supply and safety of our people and our farms and so on. One thing that Almarai feels very good about is obviously that we have continued with the on-site vaccination. So 95% of all Almarai employees have received their first vaccination dose as of September 26, and it's even increasing now. And that makes us feel good. We are obviously still very cautious about making sure that we have biosecurity issues in place for our farms, et cetera. And that has implications for people coming and going. But all in all, it's getting much better, I have to say, in the working environment. If we look at procurement of our essential materials, it remains uninterrupted. And you will see -- I'm sure you've seen already that our cash flow remains quite strong also in the quarter. There are some business issues that affect our costs that I will talk a little bit more in detail over that in a way is a consequence of the pandemic. If we move to the next page, on Page 6. We've shown you this quite a few times. I'm not going to go through this very much in detail, but it's relevant, I think, to continue to remind ourselves that we are not out of the scenario planning yet. And I think more severe impacts of the pandemic is something we also have to plan for not only for the remaining year, but also for next year. So we keep on working on scenarios when we do our planning for next year, and we have different kinds of scenarios that are relevant for us to look at, and I'll share a little bit about that when we come to this section here on the outlook. Okay. So if we then move to some positive things on product innovations. So you've seen here, we have some new products in the third quarter. Hummus is very successful. We put some lime flavor on it. That's an extension that we've done in the third quarter. We also launched brioche bread that I really recommend all of you to have a try on. It's a fantastic product that has started really well, and consumers seems to like it a lot. It's one of the innovation things that we have managed to develop this year, and it's an excellent product and hopefully, you'll all be able to taste that. And then we have some few extensions also on our existing puffs that you can see there. So innovation is back into the normality. So you'll see more coming also in the fourth quarter in Almarai. On market share, you can see that we continue to have our ranking positions as they have been all along, #1 in most position with the exception of UHT milk, where we are striving to get #1 position. With determination, we'll get there. There's no doubt. And you see that we are having some shortfall in Dairy and Foods, but we're actually growing in Bakery and Juice and lost a little bit in Poultry. Serious competition in Poultry is affecting a little bit the value development of the market shares. And in the area of Dairy, as you all know, cost increases are significant, and there's been some pricing, and there are effects of that in our volume. And even here, we see some competition in having an effect on the market share development. Structurally, we are not seeing issues in that respect. We do believe that we can manage this in the longer term. And holding our #1 position is key, but also to actually grow the share is very important for us. So it continues to remain a key priority for us. Okay. So if we then go into business performance. If we can look at the summary here. It's somewhat of a particular development. If we look at the revenue. You can see that top line year-on-year growth is 2%. It's period by [indiscernible] as you will see so. It has rebounded due to partial resumption of schools. We also have Long Life products, Poultry and Juice growing. But this is also enhanced significantly by Egypt and Jordan that continues to grow at double-digit rate. So we are getting a significant contribution also from our business in Egypt and Jordan. This will have a mix effect for us because they do not have the same average margin as we are having in the GCC region. And therefore, it becomes dilutive. And that's part of, and I'll come more into the understanding of our profitability when I go through the net profit bridge. But our operating profit declined by 31%, despite strong cost control, resulting in lower overhead. So we are not spending more overheads than we did last year. It's more related to lower subsidies, higher feed costs, higher commodity costs that drives down the actual profit in the quarter. And the net income is lower by 34%. So we've gone from SAR 622 million to SAR 409 million. So it's quite a sizable decline in the quarter, and they are all essentially coming from the gross margin. And I'll spend some more time to get a better understanding of what it is that is temporary and what is more structural that I will talk about. On working capital, we are actually doing quite well. This is a comparison versus last year's quarter. But if you look quarter-on-quarter, cash flow is actually very strong in the quarter. We've managed to actually go below and net debt of SAR 10 billion. We are now SAR 9-plus billion something. And our net debt-to-EBITDA is at 2.6x. So despite some shortcomings in the profit contribution, the balance sheet showed some improvements and therefore, we are also actually reducing our net debt in the quarter. And that's I think is a testament of the strength of Almarai in a period where you actually are having some challenges in the income statement. Our CapEx is not to worry about. It's following pro rata what we have expected. So it's really as part of our plan. So the increase is not significant if you look at it on a full year basis. It's just in line with what we are planning. And then our free cash flow is then slightly better than last year despite the shortfall in profit because of the points that I mentioned. So let's look at revenue a little bit and try to understand where it comes from and what they are from. Volume, negative 1%; price, 2%; mix here is shown as 0%, but it actually is a little bit with the roundings here. We do have a mix issue that I will share with you a little bit more that is affecting us. And the net impact then like-for-like is 1% there. On currency, we have no major impact. And then on others, we have a lot of our export sales on alfalfa from our commodities have shown a really substantial growth, which is part of our plan to lower inventory and this commodity has been doing a really, really good sales in the quarter. This also comes with fairly benign margin contribution, so that it -- the positive growth that you're seeing on 2% does not follow in terms of the profitability. And therefore, this mix issue of Egypt, Jordan and alfalfa sale is not contributing to the margin, but actually dilutes it. Although in absolute terms, we are getting profit, of course. Okay. If we go in and look a little more into the revenue on the next page. You can see that in the regions here, Egypt, 31% growth in the quarter; and Jordan also, 49% growth in the quarter. Absolutely outstanding. Well done to the team who's been driving the growth in that region. We continue to have strong growth throughout the year, and we expect that to continue. Unfortunately, for the rest of the GCC region, as you look at KSA, negative 2%. And then you can just see for yourself the other GCC have a negative average of 5% growth in the quarter. If we look at that a little bit more in detail, what does that then reveal to us on the next page here. Here you have quite a lot of numbers, but you can see the quarter since 2020 up to Q3 2021. And you can see the impact that we've had in our biggest stronghold in KSA, especially on the second quarter where we had an 8% decline. The positive of this one is that you see a lesser decline in Q3 with a negative 2% in KSA. And it's very important for us because it is our biggest market, without any doubt. So what we are seeing here was an impact that we had on Ramadan in Q2, which is not materializing for us in Q3, and we're actually starting to see some recovery in some areas in some of the categories that I'll come back into that you can see. And you can also see that if we take away the year last year, which had a lot of comparators that are affecting us, we're still a growth in mostly all the countries, if you look at the CAGR there from '19 to '21 with the exception of Oman, where we continuously had challenges due to the competition and difficulties we've had in the country in the area. UAE -- sorry, for Egypt and Jordan, you can see the continuous stride of quarters growth. We've been doing really, really well. And I would not make any other conclusions out of the performances in the quarter of the remaining parts where we are seeing some recovery, but also having some challenges. So the big part here would be the KSA being on a lesser decline that we are expected, and therefore, we're seeing some recovery coming through. If we break that down to the next chart, you can see that in categories. What's positive here is the recovery in Bakery. You see the 11% growth in the quarter, the SAR 48 million. You all remember me talking about the impact we've had with school being closed, the single-serve, which is a high-margin segment, not selling, the convenience and on-the-go being a bit under challenge, that is recovering now in Q3, and it's really nice to see it coming back, especially also with the new launches that we had. But you can also see that we are growing nicely in Long Life Dairy, 10%; Fruit Juice, 3%; Poultry, 3%. So we are growing in some of our segments and the challenges that we've had is in Fresh Dairy and Food. And Food, I think, is a fairly easy explanation. If you think about last year's comparator, we sold quite a lot of these long-life food products, and it's hard to match that. If you look at Q3 2020, there was a 15% growth of Food, of which you have an equivalent decline now. So over the 2-year period, we're still showing growth in the category. Fresh Dairy is a challenge, and I'll come back to that. We all know that we've done pricing in that area. It does have some volume effect, but it should be positive on revenue, and we have a bridge for you to see the impact on it. There's no doubt that with the costs that have come into the Dairy segment, partly in Poultry for farming, but also in Dairy, it's inevitable for us to actually mitigate this one way or another with price. There is no other way to do that. And let me explain that a little bit more. But first, I just want to show you the channel development as well, which is interesting for Almarai. Again, if I start with the positive, very strong delivery in Foodservice, the SAR 103 million here. It's a stellar performance. That, of course, has to do with the fact that we are, of course, opening up in the region. That was not the case last year, where we virtually had no growth at all or no sale at some parts. So that is definitely recovering, and it's a very interesting channel for us to grow continuously. So very nice to see the 25% growth in the quarter. The other and the export is predominantly the alfalfa sales of the SAR 72 million that you see there. Then traditional trade, modern trade being challenged. We are declining with 2% and 5%, respectively. Traditional trade, which is our stronghold, is showing a sort of a flat growth over 2 years and showing a lesser decline than in Q2. The same goes for modern trade. I think there's more challenges in modern trade. So we have to work a lot on that and the support together with our key customers here to regain share and our share of sales in the modern trade. It still remains to recover, I would say, but the positives that we take from it is that we see this lesser decline coming in, in the quarter. And we are hopeful that we see more and more of the recovery coming back into the traditional retail chains. If we then go to the next chart and talk a little bit about the financial performance. I will let Ikram speak a little bit more on the detailing of that, but there's no doubt that we do have a mix issue that I think is not structural. It's more because of the pandemic. Our traditional channels are not selling in the same proportion as they used to and that has a mix issue for us in profitability and affects the profitability. Also, our SKUs, the single-serve versus the bulk products or the commodities has a mix issue for us as well. And then if you look at the countries, the GCC, the traditional GCC, that also has an impact on our profitability. These things have a tendency to recover, I believe, in the long run. And therefore, if you look at the bridge here, you can see that on the left side, what we call market trend, the net of those 3, it's about SAR 54 million. That has to do with things that relates to the unfavorable mix. The fact that we have to do price to mitigate some of the economic impacts that we have on the right side still haven't been fully mitigating it. And the fact also that we have a volume decline, the left side is more of an opportunity to recover, I would say, and what you see in the middle there is the SAR 176 million, which is more structural. And if you think about the reduction in subsidies, SAR 46 million in the quarter, I know quite a few have asked what the annual impact is and what we think going forward about subsidies. And I think we just have to plan for those not being there. And it's not an inconceivable assumption to put in times 4 to see the full year impact on that. We had a double subsidy on Poultry, as I'm sure you are aware last year, which we don't have this year that also impacts this year. But the SAR 46 million is an absence of subsidies that we have to mitigate for. The additional large part the SAR 130 million we have in the quarter is commodity prices going up. And in particular, corn and soy with about SAR 50 million and SAR 30 million each that is affecting us. And we do work quite minaciously with our hedging policy, and we've had hedges in place which normally spans between 12 to 24 months, and we are starting to lose out on those hedges. Eventually, you will and you will have to catch up with the world market prices as you start buying going forward. And we have been monitoring this very carefully because these prices, in particular, on corn and soy, have peaked, and they are now a little bit retracting, but clearly, these things goes in cycles. It's not only affecting Almarai, it's sort of a global issue for us in terms of pricing. And supply and demand tends to even out over time. So will it be structural cost forever in Almarai? I don't think so. It will have to do with harvesting cycles and demand and supply around that. But clearly, for this year and also partly for next year, we have to cater for this commodity cost increase. Not all of it is corn and soy. Part of it is also that we are 100% importing alfalfa now from the U.S. and Argentina, which we didn't do last year, and there are some ingredient costs as well. But the big part is really the corn and soy that is driving a large component of the cost deterioration that we are seeing in our P&L. And for that, there is no other way than to work hard on our operational costs to the best of our abilities. But at the end of the day, it also becomes inevitable to do pricing in that kind of environment where you have an absence of both subsidy and the significant increase in corn and soy. Partly, we are mitigating this with improvement in the IDJ performance, which is Egypt and Jordan. So we get profit coming from there, of course. And we are also having a significant benefit of lowering quantum of debt and the interest cost is very much lower for us, another SAR 9 million. But if we compare last year to this year, there is a SAR 213 million impact, which you can see now, hopefully, that the middle one is a great focus for us to make sure that we do what's right structurally, while I think there's an opportunity for rebound on the left side with the market trends that Almarai already has a strong hold in, given our market share positions. But as things become more and more normal and schools open up fully, tourism starts and the flow of people is more on-the-go, you will have this positive effect coming through, and we're already seeing part of it in Q3. Some of you have asked whether we have Qatar in here or not? And we have yet to start selling in Qatar. So there's no positive impact of Qatar in this year's numbers at all. So when that comes into play, of course, that will be an incremental benefit for us. So with that, hopefully, you can see what's sort of on a onetime basis versus what's on a structural basis that we are working on. And with that, I'll give the word a bit more to Ikram and you can be a bit more specific what it means for the segments.

Good morning, Mr. Danko. Good afternoon, ladies and gentlemen. I think Danko has talked about the revenue development in a lot of detail, and he talked about how the company profitability, especially on the waterfall before this slide. So let me address this part by segment. And here, we will talk more about how the revenue is developing by segment and how the profitability is developing by segment. I will focus on the 6 numbers in the middle of the screen. So if you can see the first segment is Dairy & Juice. And if you can see the revenue development is like minus 2%, whereas the profit is down by minus 30%. So let me talk in detail like what's driving the reduction and why the profitability impact is more severe than the reduction in the top line. As you saw the product slide before, the majority of the decline is coming from Food sales. The Food sales was having the highest profit margin and the decline is impacting on the mix perspective. On top of it, you saw the development on channels, which are mainly in foodservices. Again, that impact on the profitability part for this segment. But the biggest impact of why we're going from minus 2% revenue decline to minus 30% on the EBIT or the net income is mainly because of the structural issue that Danko talked about. This is the feed cost of corn and soya, as Danko talked about, it was around SAR 80 million to SAR 90 million of higher expenses this quarter. Majority of it is hitting the dairy sector, although probably 1/3 of it is hitting the poultry as well. Then this is the last quarter where you will see some part of -- on a like-for-like basis, the imported alfalfa consumption. From Q4 2020, we have been using 100% alfalfa. So when the numbers start to show for Q4 2021, they will be like-on-like. And similarly, it's the case with subsidy. The subsidy impact again is phasing up this quarter. So it's the last quarter where we see this cost impact. So these are the 3 factors. The mix issue followed by the subsidy removal, followed by the commodity, followed by the alfalfa -- 100% use of alfalfa. That's the reason the reduction has been most severe in this sector. The next one is Bakery. Bakery is up by 11%, yet the Bakery profit is up by 19%. This is fixed cost leverage. We have seen the downturn of that for the last 4 quarters. But now as we are growing our revenue, our volume was up by 3%. But as you can see, our Bakery revenue is up 11%. This is the impact of having single-serve, the positive mix coming up, and that's really helping us grow profitability by a higher margin. And that's the major story on the bakery one. The next one, which is key and a lot of people have asked questions before and is on the Poultry. Poultry revenue is up by 3%, whereas the profitability is down by 51%. And why is that? So major issue coming this quarter is again because of the structural problems. We had the Poultry double subsidy overlap last year. Again, last quarter of this overlap. It is nearly the subsidy difference between Q3 2021 and Q3 2020 is around SAR 30-odd million. So this is why the profitability is far more lower. On top of it, part of corn and soya is impacting the profitability and that's taking it down. So whereas on a like-on-like, if it wasn't for the subsidy effect and wasn't for the commodities, we would have seen a pretty decent growth in profitability. We are forced to record nearly half of the profitability from about 14% EBIT to 7% EBIT because of this one-off structural problems. So with that said, I would like to move on to the next slides, which is about the financial management, it's not balance sheet and cash flow. So let me go through fairly quickly on these ones. The first one is on our working capital. Our working capital is now trending down from 21% to 20%, mainly driven by a reduction in inventory. Our farming inventory is coming down, but most importantly, our commercial inventory, which is our Dairy, Food and Juice. We have been building up inventory at the time of COVID-19 because of supply chain issues. As we are now phasing out, it is now helping us that we are destocking in that respect. And this is a point to majority of dairy ingredients as well as dairy feeds coming on the farming side as well. And that's the major driver, making sure our working capital is becoming lesser and lesser and driving us more cash flow. The next is our CapEx. As Danko talked about, you can see that on a trailing 12-month basis, we are very similar to last year. The majority of the CapEx is driven by replacement CapEx. Part of it is driven by Poultry CapEx, which is more about increasing the current capacity from 200 million birds to around 220 million birds for the next year. So we are in the last leg of the CapEx, and we are comfortable that the extra capacity will be able to come on board partially before Ramadan next year. Otherwise, the CapEx trend remains fairly flat around 6% to 7% of the revenue in the long term. Free cash flow, as we talked, the improvement in working capital as well as the long-term trend of reduction in our CapEx. Please look at the middle 2 bars. Our free cash flow -- operating cash flow round about SAR 4.7 billion, adjusted for our CapEx of around SAR 1.5 billion. Free cash flow is now above SAR 3 billion, and we are likely to close around that number between SAR 3 billion, SAR 3.2 billion, plus or minus SAR 200 million. We will see what happens at the year-end. Where is this cash flowing? We are doing a major debt reduction, SAR 2.4 billion of debt has been paid by Almarai so far for the last 12 months. And on -- further on top of it, we have paid SAR 1 billion dividend to our shareholders as well. And this is why our free cash flow remains very strong, and this will take me to the next slides, in terms of our free cash flow as a percentage. You can see for the last 5 years, we were in low-single digits, and we are growing every single year from 9% to 10% to 18% to 21% for the current year. This excess free cash flow generation is helping us pay down debt. As you can see on the next slide, if you can look on the left-hand side, and I think Danko referred earlier in the conversation as well, our net debt-to-EBITDA has come from 3.2 in 2018 to 2.6 in 2021. I'm really happy to see if you see the percentage, net debt to equity from 88% to 78% now to 61%. And as you can see that net debt is now below SAR 10 billion for the first time to SAR 9.7 billion in the last 5 years. The right-hand side graph is less glossy. It shows some of the structural problems Almarai is facing, and as Danko talked about, the actions Almarai is taking to address this decline through cost improvement in the future as well as some price adjustment depending on the situation. But this is -- our EBIT is now running around 14% and our EBITDA is now running around 25% on a trailing 12-month basis. What does it mean for our cash flow generation and our debt repayment cycle? We remain very much in control. One of our major sukuk repayment is coming on 16th of September 2022. So the debt is now moving into current, but all of our ratios, our covenants are in check. And we are very much in place, as you saw previously, we've got about SAR 5 billion of available loan facilities. So we will be looking at different options to how to manage the repayment of this sukuk. But we are fairly in control in this part. And the last thing is our dividend repayments. You can see now we're paying about SAR 1 billion in dividend this year, and we're happy to continue that track. With that said, I would like to give it back to Pratik and the operator, and we'll go through the Q&A session if that's okay. Thanks very much, Pratik.

Thanks, Ikram. [Operator Instructions] So we have the first question from the line of Duaa AlFadda.

This is Duaa AlFadda from Bank of America. So my question is regarding the Poultry. For Q2 and Q1, there wasn't -- for 2021, there wasn't any overlap of subsidies. And the mix issue was already there. And so what caused the margin to drop to the 6.5% in this quarter? So it's -- the channel has been already -- in Q2 and Q1 has shifted from retail to foodservices as well. And the subsidies has been ceased and are only on the output. So could you just emphasize on what dragged the margins that much?

Yes. I think the commodity cost that we were talking about has had an impact. Ikram, you can perhaps detail it a bit more, but it is within farming, we have an impact both for Dairy and for Poultry. So please elaborate a little bit more on that, Ikram.

So Duaa, you're right. The mix has changed from Q1 and Q2 in terms of foodservices versus retail, you're absolutely right. But the subsidy overlap has been continuing. To give you some perspective, we had around SAR 75 million of subsidy overlap last year. We received double subsidy last year, and we received it until Q3. So this is the last quarter the subsidy overlap has been happening. And because of the timing recognition of the subsidy, it's been the highest in Q3. So last year versus this year, as I've mentioned in the call as well, the gap between subsidy is around SAR 30 million. So that is one of the major reasons for reduction. Secondly exactly as Danko said, the major issue for Dairy and Poultry, both this time is corn and soya. If you look at poultry feed, 95% of the feed that the chickens are consuming is corn and soya. So if you think from a segment perspective, as the hedging cover was not available in Q3, the higher cost is impacting poultry sector as well. So they are the 2 major issues. One is the poultry -- the subsidy overlap and second is the commodity increase that has happened pretty much from the beginning of Q3.

But just to clarify -- yes.

If I just may, I think behind your question is another question on the Poultry segment and its profitability. And as you all know, we are expanding in our Poultry segment. We believe this is the right strategic move for Almarai. And we are determined to grow significantly in this area and the reference points that we are making in terms of profitability is not the third quarter profitability levels that you're seeing. And I think one has to look at it a little bit more longer term because I've been in this line of business for 30 years and corn and soy goes up and down depending on demand and supply and the circumstances that we are in. And I think they are exceptionally high at this point in time. It's impacting not only Almarai but many of our peers, as you probably will follow and see, even more severely than for us. But if you take a bigger perspective on the Poultry segment and our ambition to grow in that area, it is with profitability in the double-digit territory and not the numbers that you saw in the quarter. And I wouldn't draw conclusions out of that particular quarter if you would ask me.

Okay. Clear. But just to clarify the point Mr. Ikram said. In Q1 and Q2 of 2021, there was an overlap of subsidies as well?

There was, Duaa. So what happened? The government -- if you think from that, with the government did. The government stopped subsidy on pretty much the last week of 2019. And in 2020, they started to be on the output method starting from January. So from January till right now, they are being paying on output method and that's been fairly well, no problem on that part. Now although the government stopped bank subsidy on the feeds in -- from -- at the end of 2019, we still had a lot of subsidies sitting on the balance sheet and sitting in the inventory itself with the chickens were still consuming the inventory. And the government says the cutoff is from the LC. So any LC which was dated before 24th of December 2019 was still getting paid. So we were receiving subsidy in Q1 and Q2 for the LC that was done, let's say, in the fourth quarter of 2019. And as the chickens were consuming the stock, we had to release the subsidy. We can't keep it on the balance sheet. So Almarai recorded around 75 -- I think it's around SAR 75 million of subsidy in 2020 that related to the stock. On top of it, we were receiving subsidy every month for the output, like how much chickens are getting produced. And that's where the overlap was for. So as I said, that overlap because of the receipt of subsidy when the subsidy came, it persisted at least for the first 3 quarters of 2020. So whenever you're comparing 2021 to 2020, this is why the overlap is causing some deterioration in profitability. Hopefully, that...

Last question is regarding the SAR 130 million increase in commodity prices. How much would it be for Poultry approximately?

Probably around SAR 35 million -- yes, around SAR 35 million to SAR 40 million.

So now we will move on to the next question, which comes from Nishit Lakhotia.

I have a follow-up on the subsidy. Ikram, you mentioned was at SAR 75 million in the subsidy overlap that you had last year. So in the -- where does this show in your financials? Is it the government grant component under your cost of sales, which was similar last year to 2019 levels? So was it at that level? And how much did the government grant in 9 months this year versus last year if you have to compare it? So that's my question on the subsidy and the government grant in terms of accounting. And the second question is on the competition. We've seen you're losing market share in some of the key segments that's here in the slide. Now obviously, you increased the prices and you've seen the impact. How is the consumer behaving? Is it moving to the other competitors who have not really have increased the prices? And are you losing customers because of this price increase that you've done? And how is the environment right now in terms of customers being extremely price conscious? So do you see that in Saudi Arabia, basically, that's my question. So these two, sorry.

Can I just say on the second question that you had there, Nishit, in terms of Poultry, we haven't done significant price increases for Poultry. It's in the Dairy segment. And what you are seeing at the moment is a lot of players in the Poultry segment, where there is fierce competition, I would say, at the moment, and without making any reference to which companies you -- it's obvious perhaps to yourself that you can see that this is impacting us in the short term. I do not believe it's a structural issue for Almarai. We have very strong brand equity of the brand and our ambitions to grow in this area is very firm. And if you have impact, you'll see that on value shares that are temporary with promotions that are being put in because of activities, of recognition from some of the peers that is impacting. But structurally, over time, I'm not nervous about our position. We have to, of course, invest in our brand, and we have to mitigate with pricing where it's relevant, but we are looking at the price segments in the poultry, and we are considering being in each offering, so the premium and the mass market and the low end. And all of that is part of our Poultry strategy going forward, for which I'm hopeful that we can have a more deep dive introduction of what we are doing in a later stage, not necessarily at this point. So Poultry as a category is not declining. It's just currently under severe price pressure due to promotions and activities that is impacting us. And then on the first question, I think, Ikram, you can go back and talk about the subsidies?

Sure. So in that respect, please, on the arch on the government grant. So this is the same line that we showed the government. So it doesn't matter on the source of the subsidy, be it cash subsidy, output subsidy or it's based on the feed subsidy. The same line is being shown. Almarai has been recording around SAR 429 million, if I remember, in 2019. We had probably SAR 428 million in 2020. And what we've been guiding the market that there will be a reduction of around SAR 150 million of lower subsidy compared to SAR 430 million. So this year, we will see what happens at the year-end. But more than likely, the number numbers will be around SAR 275 million to around SAR 300 million. Almarai's subsidy right now, what Almarai receives subsidy today, as we speak, is on Poultry, which is the output metric, which is around SAR 120 million to SAR 140 million, depending on how much chicken we are producing. So that's the Poultry subsidy. And the rest of the subsidy, which is also around SAR 140 million to SAR 150 million, is on the Dairy side only available on alfalfa. So right now in the current year, we are only sharing -- only recording alfalfa subsidy. So they're the only 2 subsidies available. And because of the magnitude, I expect the number to be around SAR 280-odd million versus SAR 430 million for the full year. Now this a reduction of SAR 150 million from 2020 to 2021. This is all phased in the first 3 quarters. I would like to even see maybe if I can show the chart on the subsidy, give me 1 second, please. See if I can share this on screen. If this slide is -- if you can see the SAR 46 million, this is the red bar. This SAR 46 million has appeared pretty much for the last 3 quarters. For the fourth quarter, it is likely to be virtually nothing. It will be flat because for the fourth quarter, the subsidy is all like-on-like. The subsidy in the fourth quarter of 2020 was running at around a run rate of around SAR 280 million, which is likely to be the run rate for this year as well. So all the overlap is being taken away. The other issue of the corn and soya, the subsidy has been taken away. So everything is now out of the system, and that's the only subsidy Almarai will have. You also asked about the reconciliation. So please keep in mind one thing. As Almarai records or is consuming 100% alfalfa, the subsidy on alfalfa is going up as well. So this is why there's a mix and match what's happened. But the run rate for Almarai is around SAR 280 million, around SAR 140 million for Poultry, around SAR 140 million for Dairy or SAR 150 million for Dairy. And that's the only subsidy Almarai is receiving as we speak today. Any questions on that, I'm happy to answer that questions.

[Operator Instructions] At this moment, I don't see any further questions. So if previous ones have any follow-up questions, they can go ahead. So we have the next question from Adnan Farooq. Adnan, we are not able to hear you. I think there is some issue with Adnan's mic probably.

Can you hear me now?

Yes, please go ahead.

Okay. Great. Sorry about that. So my question was around -- you mentioned multiple times during your presentation that these cost pressures, some of them are structural in nature like subsidies going away, and some of them are not structural in nature, like commodity prices going up. And you mentioned that although you have tried to optimize the company and have been saving on cost side for a couple of years now, I'm sure there is not much left -- significant left for you to do in terms of cost. So it will be -- so price increase is probably one of the main sources of mitigating this impact. Now my question is, will you be increasing pricing -- prices just to offset the structural impact or the cyclical impacts as well? Because we don't know how long these commodity prices will stay high, maybe for another year, maybe 6 months, maybe 18 months, maybe 24 months. How long will you wait to offset these cyclical impacts as well from a price increase?

You see, that's a very good question, Adnan. And I think here, life is not that easy. So I can give you a binary answer, only yes or no. But as you are pointing out, there are different time horizons we need to work on. And when I talk about structural changes, they are there to stay and you need to mitigate them one way or another. And if you are increasing the consumers' willingness to pay by having good brand equity, which Almarai has, and I'm sure you can appreciate that like any fast-moving consumer goods company, pricing is a way to mitigate structural changes. Then on the midterm, if we talk about cyclical changes, the idea is always that we would pass this to the consumer. And the way we manage it to our shareholders is to mitigate impacts in the shorter term, 1 to 2 years, by having hedging policies in place, so that we are able to protect our margin over that period of time. And we are now coming out of that. So we are in a conundrum of something which is structural and also exiting a cycle. But if you look at the price developments of corn and soy in the last 12 months, you'll see that it actually peaked 3 months ago. I'm not saying that it will not continue to go up again, but it actually is retracting at the moment. And all of that has to do with the seasonality of farming, where you put more crop in on things that are more attractive as a farmer, if corn becomes high-yielding crop, then you put more of the corn crop in the ground, and simply then, the supply increases, and I'm not going to sort of inform you on how it works, I'm sure you all know how that works. But it takes 1 to 3 years, around that time horizon. And that's normally why Almarai has 12 to 24 months of hedging so that we can go unaffected of these cyclical trends. Unfortunately, in this case, with the pandemic, I think some of them are structural. So subsidies, you simply have to pass that on one way or another. Commodity increases are cyclical. If we can manage, we wish to avoid it. But in this case, you see the impact is way too high for us. So we have to mitigate it. Then it's also -- let's not forget that you'll never come back to square one again. This is, for us, an impact of revenue. And of course, we need to continue with good innovation, investments in our brands, grow our top line, hopefully coming back with what I'm sure will come back in terms of the single-serve high-margin products. Revenue growth mitigates a lot as well. So we are seeing a dampening effect of the negative trend that we've had in Q2, in Q3. And without giving any forward-looking statements, I'm quite optimistic about us recovering into segments and categories and segments and SKU segments where we've been in the past where we weren't, let's say, for the second quarter and the third quarter. And that's very, very short term. So it's 3 time dimensions that we have to work on, very unfortunate to have #2 and #3 sort of coinciding that we need to do pricing on. But if you think about Almarai for the next 5 years, where are we in terms of our profitability levels and some of it will definitely come back, not all of it because it is structural, for that we need to do pricing. And then it's important maybe to look at Almarai's price points in GCC relative to the rest of the world, the Dairy segment in the U.S. and Europe and where are we in terms of pricing. Very sensitive questions, of course, and I will not make more statements than where we are at the moment. But it's evident that the impact is coming through in our bottom line and for that we need to mitigate it. That was a long answer to your question, but it's a good question, but it's a complicated answer, to be honest.

Understood. And I get your point to some extent. Just a follow-up. You mentioned the third dimension, improvement in categories and SKUs. That's because of market recovery? Or is -- or...

Yes, absolutely. And I would say that you had a tendency to move to more value packs in the pandemic and less of the single-serves with the on-the-go and impulse trade where you go into the store, and you didn't really think of buying a croissant with chocolate in, but you actually did when you came out of the store. All of that kind of impulse trade that we have a lot of our products in were suffering because of the pandemic. There was less flow of people. Population has declined in the segments where people are buying dairy. The VAT of 15% is impacting your share of wallet and your consumer behavior has changed partly because you have less disposable income to buy products. All of that relates to the pandemic and the restrictions that, that impacted us in. The back-to-school, now we are already seeing a recovery. If you look at Bakery, it's very clear for us that we are now seeing an increase of the single-serves because that's what they put in the backpack when they go to school, some UHT drinks or some croissants or food that they have in the backpack. All of that is recovering. So I would say that's a very short component for which we are hopeful that it will recover even further. The religious tourism in the west side of Saudi is another good example where we had an impact. And when that is recovering, it's also going to impact our sales of the convenience products.

So we will move to our next question, which comes from Alowi AliMirah.

If you can please elaborate in terms of the distribution channel. Because if I look at Slide 15 and going back to your opening remarks, traditional trade is doing better than modern trade. But from your remarks, it seems that you need to invest more in modern trade. So if you can elaborate more? And what's the reason behind that?

Yes. So well, first of all, the comment that I made is that we don't want, of course, foodservice to replace our sales in retail. We want foodservice to be on top of our retail sales. But this is not because of poor performance of our key accounts in modern trade. It's part again of consumer behaviors due to the pandemic. And we've saw really, really big shifts. If you think about our traditional trade and the curfew that was introduced last year, it increased significantly due to the closeness to the store. And then the panic buying that you saw increased modern trade significantly because of the stock ups that was done of products for fear that they would actually go out of stock. So we have a lot of noise or impacts that has to do with comparators due to the pandemic in these channels. Retail continues to be key for us, not only foodservice but also wholesale. We are investing in making sure that we have a channel for wholesale. Modern trade has not developed in the way we have expected. But if we look at the different retail chains, some of them, we are very successful and in others, we have challenges. And with 1 or 2 of them, it actually coincides with their own performance. So it is important for us to win with winning customers and in some parts, we are. But in other parts, we also see challenges in the outlets of the modern trade that we have to work together with the customer on making sure that we become a winning team together there. As you know, modern trade also invests in discounts in a way we don't do in traditional trade. So it is a delicate balance of how much to invest and to make very pointed and clever investment together with our customers in modern trade to get the biggest yield for this. And clearly, we think we can do more in that space than what we've done so far. So even though the trend with modern trade is not as favorable as what we are seeing now with the traditional trade recovering, it is a key emphasis for us to succeed in, also because modern trade is actually growing as a category overall.

And then just a quick follow-up. So putting aside the COVID-19 impact, are you seeing structural changes that modern trade is gaining more market share over traditional trade? And these numbers obviously shows that they're not, but going forward in the short term, do you see that?

Yes. I mean the modern trade as an outlet is growing, as a category is growing. And it's no secret that it's important for us to be part of our key customers in modern trade. And there's still a lot we can do in investing together on modern trade because it's an obvious place for us to be in and -- yes, that's essentially what our position is on modern trade. It is growing, and we need to be in there. And there's a lot of good business one can do together with modern trade. But it requires also that it's an aligned strategy with the retailer. And some of them are going very, very well, but there are others who are having big challenges at the moment, and it's important that we are working with them to recover.

So maybe we can take a couple of more questions before we wind up the call. So the next question is from the line of Nauman Khan.

Just a couple of things. I think you talked in detail about the cost of soybean and corn, and that have impacted you. So just a ballpark number, if you can provide us, is that how much is soybean and corn makes up of your material cost, like a ballpark number in 9 months or particularly in Q3, one. Second of it is related to Poultry business as well. I think you are expanding as well. But there are other companies that have gone recently listed, and they have also shown a lot of inclination towards rapid expansion as well. So just your take on that as well, like what do you think of the competitive dynamics going forward in the Poultry segment?

If I may just take the second question, and then Ikram, if you can take the first one. I think there's no doubt that there is a huge market for poultry. We believe in this category. And it's important that we are investing in quality that you can trust. I think it's branding. Branding is important. You also have to have the vertical integration, which we have, as you know. We have farming in place. We have the biggest logistics company in Saudi Arabia. So we have the conditions to succeed, I think, in this area. And we also believe that the category will grow significantly in the future. So there's no doubt that there is competition. And I think those who are playing it in the best way will win in the marketplace. There will be space for more players in the market. It's part of also the food security agenda, in particular, in Saudi Arabia, where there is certain relevance of making sure that we have domestic production. So we feel that we are very much supported in our growth ambitions in the Poultry segment from many, many stakeholders. And there's nothing wrong with competition per se and the differentiator becomes your vertical integration, your quality component, the quality you can trust. Essentially, at the end of the day, the consumer prefers to take our products because they trust our quality 100%. It doesn't mean that they don't trust others, but they feel more that -- willingness to pay is higher because of our premium quality stamp. And if we look at the market that we're in at the moment, we are in the fresh segment predominantly and we are in the retail segment, predominantly, and we are growing significantly in foodservice. It's difficult almost to keep it up in terms of our supply chain, as you know. And the fact that frozen poultry is also an area where we have quite sort of on the margin reasoning around it where instead, we will like to put more emphasis on providing the offerings both on frozen and fresh and in retail and HORECA. So if I think about the opportunities for Almarai, they are clearly there. And you need to win in the marketplace with good brand equity investments and also making sure that your vertical integration is working well, and we feel very confident that we have those capabilities for the next 5 to 10 years. And then back to Ikram, if you can just take the first one.

Sure. So the total spend in the P&L is between SAR 800 million to SAR 1 billion for corn and soya and soya-related products, be it soya art, soybean and there's different, soybean meal. So in totality, it's between SAR 800 million to SAR 1 billion, and that covers both Dairy and Poultry.

For this year, right? For 9 months?

Yes. No, no, I'm talking an annualized number.

So that would be the last question on call for today. So I request everyone who all have further questions, please e-mail it to Investor Relations team at Almarai, they are really very helpful. Or alternatively, you can also e-mail it to us, and we will try to get the answers to you. I would now hand it over to Danko for any concluding remarks. And yes, over to you, Danko.

Well, thank you very much for this call. And clearly, it was a challenging quarter for us in terms of profitability. We are growing with 2%, but it was a significant decline in terms of our bottom line. However, we feel positive about the signs that we are seeing in the marketplace that things are recovering back into more normality. COVID is around us, we need to act accordingly, of course. But we are seeing more movements and more positive impacts that comes back into our traditional sales, which hopefully will give us more leverage for the next quarters to come. So with that in mind, we are now up for our fourth quarter and our full year numbers that we will present to you in January. So thank you very much for listening in on Almarai. And again, if you have questions, feel free to contact Ikram or myself also directly, and we will do what we can to help you understand if there are things that are needed to be explained. Thank you very much, and take care of yourself and talk to you soon again. Bye-bye.

Welcome Almarai team. And thanks, everyone, for joining. Have a wonderful evening ahead. Bye.

Thank you very much.

Bye-bye.