Almarai Company (2280) Earnings Call Transcript & Summary

Welcome to the Fourth Quarter '23 Earnings Call of Almarai. Today, we have with us the senior management of the company led by the CFO, Mr. Danko Maras. The meeting would comprise of a short presentation, followed by the Q&A session. With that introduction, I will hand over the mic to the Almarai team. Over to the Almarai team, sir.

Thank you, [ Hamed ], and welcome to Almarai Q4 Earnings Call. This is Mohammed Alkhaldi and I am here today with Almarai, CFO, Danko Maras; and Ikram Ulhaque, the Head of Finance. First, I would like to thank [indiscernible] for hosting and organizing our call today. As usual, I assume all of you have downloaded the earnings presentation. For those who haven't, please go to Almarai website, Investor Relations page, and you will find the decrement. And before we start today, please pay attention to the disclaimer on Page 2. Danko, over to you for the next page.

Thank you, Mohammed, and good morning, good afternoon or even good evening, ladies and gentlemen. I hope you had a nice holiday period and moving straight into the earnings call. I'm sure you all have busy days in the next couple of days to come. But today, it's about Almarai, I will continue to do what I normally do. We'll talk about market dynamics, business performance and then a little bit more detailed financial performance. And then we do some Q&A. I'm sure you have a lot of questions, so that we look forward to that when that session starts. If we just move to the market dynamics, you can look a little bit on a summary of our innovations. And a lot of it is, of course, flavor and packaging extensions that we do on our existing portfolio, but also some new products. If you remember, we launched our seafood product, Seama in the third quarter. It's interesting, the poultry side on the very bottom right there, you see the whole first chicken is in the new packaging, doing very well. And we also have marinated chicken parts now in [indiscernible] and biryani and the demand is very, very high. So we are fortunate to see innovation in that area really tapping into the consumer demands that we are having in the poultry segment. And poultry is doing very well, as you can see on the next page, if we just move on and look at the market share development. And just to go straight down there, you see we are continuing to essentially sell what we can produce and the 39% market share in poultry is a rapid, rapid increase. And again, we are very confident about the whole category in the segment. I'll talk a little bit more about that when we talk about our investment plans. Dairy is doing well, holding position. Food growing also back into 35%. You can see we only have November available. And of course, we will update that when we can but then Juice is tapping a little bit, and I need to say a little bit that the point that we were making in Q3 on having production issues in one of the lines some effects of that is in October as well. So juice is coming up nicely as we are looking into the development in December and January. Bakery, we are holding it firm as well around 54%. So no particular issues for us to be concerned about. Continuing to look at the highlights, if we can, on Q4. So I'm sure you've seen the headlines that have come out in the press, but 2% growth in the quarter. Underlying, if I may say so, the GCC components growing 5%. However, we have been impacted continuously, and I know I've been repeating this a few times, but we do have an impact on our export sales of alfalfa from the U.S. to Asia that drags down the revenue significantly, but does not affect the profitability in any amount in terms. And then also, of course, Egypt and Jordan, and particular, Egypt, affecting us because of the devaluation. I think it might be notable to say that underlying in Egypt, the underlying growth is about 50%. But obviously, as we start comparing versus last year, you have the devaluation impact that also impacts our revenue. The underlying profit from both Egypt and Jordan come also into a little bit more doing actually quite well. So we are protecting the bottom line, but we do get a deflated impact on the turnover. Operating profit increasing with 5%, this is both to normalization or stabilization of our commodities and pretty tight cost control in the organization to ensure that we are driving value in all aspects of the line items. And then on net income, we have almost equivalent growth of about 4%, where the really residual difference you see there is the increase that we've had on interest cost going up to SAR 375 million in the quarter. Working capital is increasing. We have, as you may know, Ramadan coming. And again, we are moving it 9 days forward from last year as we do every year, and it's coming dangerously close to the year-end. So we need to start preparing with our inventory to ensure that we have an appropriate availability of supply for the Ramadan period. And we are in the middle of preparing for that. All of it is going very well. But obviously, it had an impact in our working capital. The SAR 0.5 billion of increase in CapEx comes from the expansion we are now doing in poultry, which is in full swing. A lot of activities is going on up north in the kingdom in building for the capacity of having about 450 million birds. So you'll see more of this and it's more to come also in '24 that we can talk about. Free cash flow is SAR 555 million, the same as every year -- sorry, as well as quarter, I'm sorry. And nothing to be said on that. I will talk more about full year. If we just dissect and look a little bit on top line and look at it from countries, categories and channels, you see obviously that both KSA and UAE, which are 2 largest markets, in the left side of the pie chart shows you the proportions we have on country share. So both KSA and UAE are doing very well. Oman, growing nicely with 9%. Also, we are now including Qatar, we are selling bakery products, and we are optimistic about our ability to expand the category for '24 onwards. It's nothing that I can confirm, but there seems to be an openness to actually expand a little bit more. So very exciting news for us to see Kuwait growing. Kuwait -- sorry, Qatar growing. On Kuwait, we have 4% and then Bahrain sort of flattish and then with Jordan and Egypt and others being the alfalfa dragging down the turnover a bit from what I was mentioning for. If we look at categories, again, fresh dairy and poultry growing nicely. Also on bakery and foods, we are growing. And I come back to the point I was mentioning about us having production issues on one of the machines in Q3 that we talked about, that affects the fruit juice and long life dairy. And there you see the impact. And you'll see that also when I show you the full year numbers. But we are coming out of that. It was something that was residual for us in October, November, so well and we can see a really good, nice pickup in both December and onwards. On channels, the core channels is evenly split, both traditional trade, modern trade growing about 3%. So it's 1% full year, they grow 10%. So it's a bit of an impact that we have also due to the Juice and the Long Life affecting the channel. The export part is entirely the alfalfa that we're relating to. Okay. And then if we go in and look at the net income bridge, I will give the word to Ikram to go in a little bit more in detail. But just a key issue for us to keep in mind that you've seen throughout 2023, significant pricing that has been done. That is take bring off now. We don't have intended pricing to be done significantly to the levels that you've seen in the last 2 years. So the net pricing of SAR 107 million is sort of the residual impact, the volume mix and the contribution from that is about SAR 15 million. We do have costs coming through of about SAR 58 million, but less than what we see on pricing. And our operational cost is also partly onetime costs that we are having in the fourth quarter. Otherwise, good control of the, let's say, labor and overheads, but some onetime affected us in the quarter. The funding you see there is entirely the increase you have in the interest cost that has affected us. So if I give the word to Ikram, please feel free to go a little bit into detail into the categories and [indiscernible].

Thank you very much, Danko. And I'll go to Slide 15 to talk in more detail. We're going to discuss in detail about the revenue, operating profit and net income. I think, Danko, you've discussed revenue in quite a lot of detail. So I'll focus more on operating profit percentage growth rates. So compared to revenue growth of 2%, operating profit grew by 5% and if I can summarize it, there will be 3 major reasons why the growth is stronger than the revenue growth. The first growth -- the first reason is the continued trend of stabilized commodity costs that helping us grow operating profit percentage. Second is a favorable mix. You heard Danko talk about country mix, so KSA, Oman, those country mix is helping us grow operating profit and same favorable mix for the product as well. Poultry product mix is more stronger. So that's also helping operating profit percentage growth. The third reason is the strong cost control, which is in Almarai DNA, and it's helping us to improve operating profit percentage higher than the revenue growth rates. And we look at net income, net income growth is very similar to operating profit growth rate 4% and as Danko talked earlier, it's purely a result of higher funding cost driven by the rate increase, and I will talk about the rate increase when I will discuss the full year numbers. But before that, let me talk about the Q4 numbers by segments. When you look at by segment, you can see Dairy & Juice, Bakery, Poultry, and I will focus more on the middle of the page where I will discuss the growth rates by revenue and the net profit growth rates for each of the segments. So despite the challenges that we faced in the Long Life Dairy and Juice and the Egyptian pound devaluation, we're happy to report Dairy & Juice still grew strongly by 1%, positive growth rates, driven mainly by Dairy. And the profit was also a positive 2% growth rate higher than the revenue growth rate driven by very strong cost control. The second is Bakery. Bakery profit exceeded SAR 700 million for the quarter, as you can see on the top left-hand side. Volume growth was driven by bread and buns and the revenue growth was driven by snacks and treats. In summary, Bakery grew by 2% on the top line and because of fixed cost leverage, Bakery net income grew by 21%, as you can see at the bottom of the middle of the page. Poultry profit. Poultry revenue for the quarter was SAR 945 million, very close to the magical SAR 1 billion mark. And I'm very happy to report that Almarai Poultry had one of the best quarters in its history. Almarai sold 67 million birds in the quarter, a new record for Almarai. Because of this volume-led growth, top line grew by 12% and the bottom line because of this operational leverage grew by 25%. With that said, I would like to request Danko to take us through the full year numbers, and I'll come back to [ it later ]. Danko, over to you.

Thanks, Ikram. So if we try to go through the full year as well and maybe emphasize what has been the trend throughout the year and also in the quarter. Our revenue growth is 5%, reaching SAR 19.6 billion, SAR 853 million. Again, if we talk about the trends of the effect we've had with the devaluation and the [ outfall effects for ] impact that has dragged it down, our underlying GCC growth in the year of '23 was about 8%. And I think that is across the board, a good result of 2023 and operating profit then continues to grow even more at 18% with about SAR 418 million. The expectation we had an increase of commodity cost that has been our theme became somewhat muted, but please also remember that it didn't mean that we didn't have cost increases. We did have cost increases but to a far lesser extent that we were expecting initially in the beginning of the year. And this normalization is continuing. So we look very positive to how things will develop for us. However, as you all know, there are some geopolitical issues that will affect us. I know we have received questions on what the Red Sea situation means to us, et cetera. All of that we need to incorporate in our conduct for 2024. But assuming that they are short-term issues that can be resolved, we are continuously looking for an easing of the commodity costs as we go forward. The net income grows about 16%, up to SAR 2.049 billion. So it's nice to be above the SAR 2 billion territory again, and SAR 289 million. And here, it's a little bit the same as the fourth quarter. But please also remember, a little technical detail that last year, we included our joint venture with Pepsi in IDJ in our full year numbers all the way down to EBIT. But then we eliminated that between operating profit and net income in noncontrolling interest. And because of that, you had a disproportionate impact between operating profit and net income. From now on, we don't have that. We own it 100%, and they are delivering a profit. So you will see more congruence following between operating profit and net income going forward. And the real differentiator we would see is the impact that will come on interest if it moves significantly. So that's basically close to SAR 20 billion with the rounding on revenue and about SAR 2 billion on net income in bottom line results. The EBIT margin being 14% is good. I'll talk more about that when we come to those charts, but it's nice to see that recovery come through. On working capital, as you saw, the increase is the same number as in the fourth quarter because they are both the year-end to SAR 641 million is the increase. I'll give you the reasons. And then if we look at CapEx, SAR 1.2 billion more than last year. A lot of it is, as we talked about, the expansion that is in full swing at the moment in [ Changli ] in the high area for our poultry business not only on poultry business, but also the fact that we are now expanding into red meat and to seafood, we are spending more in CapEx and rightfully so with the strategic intent of creating more returns from those investments and diversifying our portfolio. So if we look at free cash flow, it's coming down about SAR 663 million in the year. And much of that is related to the increased CapEx that we have in our business for future business that will give us good returns. So all part of the plan. And with that, moving into again, dissecting the revenue on a full year basis. And again, you see very strong proportion of our sales in KSA at 67% growth being the highest with over SAR 1.1 billion, UAE SAR 91 million and you can really see all the way down to GCC that we are very close to those 8% that I was referring to in terms of overall growth in the GCC area and then being impacted by really 2 parts: the Egypt devaluation and then the alfalfa sales that we have in Asia. If we go to categories, I think the call out we will see here, if you just add the Fresh Dairy and Poultry together, that's where you see the growth. And we come from -- we've seen from Dairy and now we start seeing poultry also growing rapidly, and it's fantastic to see 2 categories grow over SAR 1 billion. Notwithstanding with that, we're also growing the Foods business, SAR 176 million, Bakery, SAR 145 million. And without those glitches, I was referring to Fruit Juice, Long Life Dairy, it would have been better, but that's a consequence of the issue we talked about in Q3 and then other sales being the alfalfa sales for Asia. And again, on channels, good growth in traditional trade of 4%, and that is the stronghold, as you know, with 56% total sales coming from traditional trade but also rapid growth in Food Service, SAR 298 million or over 10%. We are now looking at SAR 3.2 billion of sales in Food Service, which is great to see. And we continue to expand in that area. Modern trade growing about 6% is also good, and I'll leave the comments for other and exports going forward. And again, looking at the shape and form of our income statement in a summarized way, again, I visualize essentially what you saw for Q4. But here, you can also see the impact in '23 with SAR 1,760 million starting point, SAR 81 million coming through volume mix and others. And then less pricing than we did in '22, but still up to about SAR 900 million, costs related to that are less SAR 689 million, so that gives us leverage. Operational costs, I know I will get questions about diesel. We also have diesel increase of cost in '23. And it's about SAR 35 million already there, that is part of the operational cost that we have to deal with. Funding cost is about SAR 100 million lower, approximately same debt level, but because of the rise in the interest rates and the fixed versus variable portfolio, it's about SAR 100 million that we are paying north of that. And then obviously, in our transparency, we have one-off items that those are the food security support that we received in '23. We also did write-downs in '22 that are comparable benefits as we got credits from Sukuk and I will sort of bundle it together. I'm not a big fan of highlighting one-off items all the time. We talk about our results the way we can. But in and out in all transparency, we thought would be showing that for you. So up to SAR 2.049 billion and I think that's a respectable result for the year, and we're aiming to go for more, of course, as we move into the next year. So a little bit more building it down into categories and profitability, Ikram if you could just go through that.

Thank you very much, Danko. We'll repeat the slides with the same flavor as we talked to Q4. So I think revenue, we talked in a lot of detail anyway. Let me focus on operating profits and net income sections. Operating profit of 18%, I think Danko has also talked on this issue. And the rationale is very similar to Q4, but I'd like to reiterate those 3 points: stabilized commodity costs, positive mix, both product and country and thirdly is the strong cost control. These 3 factors are the reason why operating profit is growing at 18%, much higher than revenue growth of 5% and when I look at the net income, net income is also going at 16% despite higher funding costs. If you look at Almarai interest rates today, we are effectively paying around 5.5% to 5.7% effective interest rates, which is nearly 1.5 percentage points higher compared to last year. As you can well imagine, this is adding a big burden on a funding line. But this is getting offset by one of the key benefit of having an IDJ acquisition. As Danko talked earlier that the underlying business is still doing very well and I'm very happy to report that IDJ net income in Saudi Riyal is nearly 30% higher in 2023 compared to the year 2022 and this is also helping us report a net income growth of 16% despite higher funding costs. With that said, I would like to focus on the full year by segment on the next slide. Here, you can see the total year results, and I'll focus more on the nature of the business as well by the end of the slide. Let me start with Dairy and Juice. And again, as Danko talked about, the challenges we faced in Q3 and Q4, the growth would have been much higher. But regardless, we finished the year with 3% growth rate on Dairy & Juice and our profit was growing higher at 4% year-on-year, driven by cost control and higher marketing investment as well. Looking at Bakery, 6% growth for the full year, driven by mainly bread and bun category. And because of this volume growth rate, the profit grew at 15% on a year-on-year basis. Poultry is now hitting SAR 3.5 billion in full year revenues. If you look at number of birds, Almarai sold 254 million birds for the full year and this volume-led growth, not price-led growth, resulted in 17% growth on a year-on-year basis for poultry. And because of the volume-led growth operational leverage is very high, and the poultry profit grew by 43%, as you can see in the middle of the page. Before I leave this slide, I would like to talk about the different operation nature of each segment. If you look at the bottom left-hand side, you can look at the percentage of revenue. So for every Riyal Almarai sells in Dairy & Juice category, Almarai pockets 10% in net income. But for the same Riyal the Almarai sells in bakery, Almarai will report a 15% net income. Bakery remains the most profitable category for Almarai. And if I have to give an award, I'll give to Poultry for the most improved category where every real lets us report 12% net income for the year. And that's the story for the full year by segment. I would like to go through in detail through some of the other balance sheet slides. So let me move to Slide #27. Here you will see the trend of CapEx, and you can see that Almarai is starting to invest more into CapEx. We are spending 13% of our revenues in CapEx this year, SAR 2.5 billion. Of the SAR 2.5 billion, SAR 1.1 billion was invested in poultry. This is the expansion that Danko talked in the North of the country. If you take away the poultry expansion, you will see that the CapEx will come back to a normalized level of 1.3% to 1.4%, which has been the historic rate for the last 2, 3 years. Please do expect this graph to trend higher for the next 2 or 3 years as Almarai completes its CapEx for SAR 6.6 billion by the year 2026. Working capital. Last time we met this number was 25% in Q3 and as Almarai management, we promised that the number will come down, and we are very happy to report to see that the number is now 22%. And this number would have been even lower, working capital as a percentage of revenue should have been close to its normalized trend rate of around 20% had it not been for the phasing of Ramadan. And we remain confident for the next 2 or 3 quarters will bring this number back to a normalized range of around 20%. The next slide, Slide 29. This is a new slide we've introduced. As we are entering the investment cycle for poultry, we thought it's better to show the investors how Almarai is generating cash on underlying business. So despite investment in working capital, you can see Almarai turned SAR 4.5 billion in OCF. And if you look at percentage of revenue, we generated about 23%. And we remain confident as we manage the working capital as we do our revenue base, we will be able to report an even higher percentage in the next 4 quarters. Let me now move to slides where we will talk about the bridge for cash flows. And one of the best things I like in this slide is the big green bar of SAR 5.4 billion, highlighting how much cash Almarai is generating on an underlying basis. This is getting offset by working CapEx, working capital expenditure of SAR 0.9 billion, so OCF remains at SAR 4.5 billion. SAR 4.5 billion is getting consumed by investment CapEx of SAR 3.3 billion. Where is this money going? SAR 2.5 billion is going into property, plant and equipment as we talked before, and about SAR 800 million is going into biological assets. And if I look at the free cash flow of SAR 1.2 billion, SAR 1.2 billion is being distributed to shareholders at SAR 1 billion and our banks at about SAR 600 million, which is asking us to borrow more money from the bank and how this extra borrowing is affecting our net debt, I would like to request Danko to take us through that trend. Danko, over to you on Slide 31.

Yes. Thank you, Ikram. So just a few more slides and then we'll start with the Q&A. Despite the investments that you've seen that we've done, thanks to the improved EBITDA and the fact that we are improving our underlying performance, so well, our net debt trend or net debt-to-EBITDA ratio continues to be very low relative to our strategy of being somewhere around 2.5 to 2.7x to have the optimal balance sheet structure for Almarai. So we feel confident about our ability to internally generate the cash that we need for the expansion we're doing both in poultry and elsewhere. And we see the 2.1x net debt-to-EBITDA continue unless there are any significant strategic events happening that might impact that. So very confident about the balance sheet structure, the same with the net debt-to-equity ratio that even though a little bit higher net debt because we have more equity, it's at 53% continuously. So positive development in that. A bit of a positive problem if you can appreciate what I'm highlighting. So having a little bit of a leverage, which is below the stated strategy that we do. The EBITDA and EBIT margins is perhaps also very positive to see that many of you have asked me, when is the trend changing, when is it going up again. And it's been very positive to see that we grow profitably, but we also improve our margins compared to '22 and '21. Still our ways to go for the specific year in 2020 and backwards in time. But the reality is that it's nice to see how we are swinging back to an EBIT margin of about 14% and an EBITDA margin of 23%. And assuming there are no major geopolitical events or any other distortions happening to us in '24 onwards. We look positive to the development of both top line and bottom line in '24 onwards. With a last point in debt maybe. As you know, we've launched Sukuk in July last year on quite favorable terms that will be repaid with another Sukuk in March '24. So we have this deposit that you saw on Ikram's chart. The SAR 1.9 billion that we shaded there is actually excluded from the calculation and moved into about 5 years on the SAR 2.8 billion in total. And that's because we've locked in the refinancing already in a deposit so that is yielding returns to us. So it's at no cost for us at all. Frankly, it's a little bit of a gain and that will be used in March to refinance the Sukuk that matures. And with that in mind, you can see debt maturity profile. Now please go back to debt maturity profile being fairly even over the years with 4.8 years and whatever shocker might happen in the world, we are able to repay all of those amounts through our own internally generated cash flow. So we are in a good position when it comes to the borrowing portfolio that we have in place. Finally, on dividends, we've announced where the Board of Directors have announced for the AGM approval on the 2nd of April, a SAR 1 billion dividend. And it's been steady for 4 years. But if you look at the ratios relative to the net income, you can see that it's more and more in line with the 50% that we say that we should stay within. It's been up or down in different levels. But hopefully, all of that is a nonissue and it will be approved by the AGM in April. So that's it. In summary, we are very happy with the delivery of 2023. We look forward to 2024. We are ready to continue to grow our core markets also moving in, in line with our strategy into adjacent markets. Exciting to see both ice cream, seafood, red meat and how we can expand in those areas. I'm excited to see how we are diversifying portfolio because it is also diversifying the risks, as you know. And bottom line is moving in the right direction. And assuming no major events materially happening on the front, we continue to see an easing of those commodity costs. With that, I would like to end the presentation and start with the questions and answers, please.

[Operator Instructions] The first question that we have is from Fahad Ghamdi.

Okay. This is Fahad Ghamdi from [ MBK with ] management. The first question is, while you are shifting the [indiscernible], we would like to understand the impact on the excess milk capacity that used to be allocated to the UHT production. Is it going to cause oversupply in the fresh market? Or what are you planning to do with the excess capacity?

Okay, Fahad you said that was your first question. Do you have more questions?

Yes, my second question is in regard to the recent regulation that allowed to plant the seasonal further. We would like to share you -- we would like you to shed some light on the impact of such a decision on you.

Can you repeat the question, please, Fahad?

So the recent regulation that allowed planting season further in Saudi Arabia. We would like to have some clarity on the impact of such decision on you.

It's clear. So on the first part, when it comes to UHT and [ skill ] milk, we do not have an oversupply of milk in Almarai. We are -- we have years of working through what you normally would see in a dairy company where you work with something called milk balance where you try to make sure that you optimize the right levels both for fresh dairy but also for Long Life Dairy with different recipe. So all of that has been incorporated into our strategic planning for farming and the supply of milk in house is going to be provided. Our efforts in Long Life Dairy and UHT is not necessarily a short-term ambition that we're driving here. It's much more into a longer-term vision about making sure that we become the #1 in Long Life Dairy. And we are persistent about our drive towards making sure that we have the best consumer offering in Long Life Dairy and over time, you're able to adapt accordingly when it comes to the milk supply. So we do not have any surplus milk if that was the expectation. We are accordingly planning, and we are able to do so with the capacity that the farming divisions were able to give to us. So no issue for us in terms of supply and then in terms of the announcement of the regulation of alfalfa, it's not necessarily alfalfa. We are a little bit in a waiting mode, to be honest, we need to know a little bit more about what it actually means to us. And as you know, we have invested significant effort and amounts, both in the U.S. and Argentina and we are getting excellent supply from those markets today with world-class alfalfa. The decree or the announcement that came was not necessarily focus towards alfalfa, it was other crops. And if Almarai were to embark upon resourcing it from Saudi Arabia, it is a very material amount that is needed. And that clarity is not there at the moment. So we are expecting to hear more on it. We are following it and trying to understand what it will mean for us. But I don't know, current plan is that it's not going to affect our current operations. We continue to maximize, let's say, the efficiencies that we are now getting from an already well-established structure, both in the U.S. and Argentina. We also source from Europe to a certain extent, but not the high quality alfalfa that gives us optimal yield for our cattle in Saudi. It's very specific alfalfa that has very high quality.

Okay. Just to follow up on the first question. How is the transition is going? Because what I noticed now only the small bags are SMB, but the other bags are still fresh milk.

It's a balancing act of -- depending on which market and which channels we are in, we are in some category -- sorry, in some channels and countries, we're having fresh milk and some we have in recombined. It comes down to the recipe per se for the retail market in KSA where the important thing is that we have created a recombined solution that we believe has a superior product taste to our competitors. And I emphasize the point that we are in there for the long run, and we don't necessarily look at what happens in market share for a month or 2 or what happens in the quarterly results. Our commitment and announcement to you and everyone else out there in the market is that we will become #1 in Long Life Dairy in the GCC region. And if that takes a year or 2 or 5, it doesn't matter. Our efforts are very strong in making sure that it becomes a success. And that is a composition of making marketing events, having the numeric distribution that you need to have for the Long Life products, product offering to the consumers that the taste is superior to everyone else. It's a lot of things that needs to work. And we are putting a lot of emphasis into it because we think that this belongs to Almarai for sure. And so no particular comments on how it's going for the month or 2. But what we are seeing is a fairly good sell-in.

Sultan, I have unmuted you, if you can please unmute yourself.

Is on going back to the [ SAR 2 billion ] mark. I have a few questions, if you don't mind. First would be, what would be the volume growth that was achieved during the quarter? And if you can share for the full year, and whether it would be specific for Saudi as well.

At this point, we're not disclosing the split between price and volume more than what you saw on the bridge that we were providing but it's not unfair to say as a guidance to all of you that we are coming out of a period where we were forced to do significant pricing and not only in '23, but also in '22. Both in '22 and '23 in our core market, we've had overall positive volume growth despite the fact that we had to do significant pricing. Now the pricing activities that we look for going forward are essentially fairly benign. There is no pricing activities needed. Of course, you need to discuss and understand the implications that diesel will have for us. We see an impact of about SAR 100 million for Almarai. So it's not materially impacting us, and we have included that in our budgeting to make sure that we deliver an even higher profit despite that. But we do look at what the impacts are for commodity costs coming in. Otherwise, no pricing is really planned. All the growth that we essentially look for as we go forward will be volume. And we are confident about our ability to do so in the respective categories. So I will potentially disclose a little bit more for you in Q1 as we are going in and see how the split would be so that you get more clarity because we have this disruption of having very strong growth coming from price and despite that, also having good growth in volume less than in '22, but still positive. And then '24 onwards, it's a year of volume.

And you mentioned the diesel impact. I'm just wondering what do you think of a possible impact that could be happening because of the increase in shipping rates due to the Red Sea shipping disruption that's happening? And if this lingers would this probably prompt the company to discuss maybe further price increases?

Yes. I mean your point is valid. We look at all the external factors and how they are impacting us. And as you know from our past, we believe that commodity cost increases should be passed on to consumers in efficiencies, we need to work on internally, but commodity cost increase we need to deal with. The situation in the Red Sea is developing, and it is still possible to come to the ports in Saudi Arabia, if you go through the Suez Canal. And what we are not seeing is an average increase of container prices with the shipping lines that we're having for San Diego and from Argentina, Buenos Aires. It's more coming from Asia, where we have shipments that are going through the Suez Canal from the south. So part of this, we were necessary to even do an effort if we need to do so to ensure that we don't have supply disruption. But it's very early to say what the impact will be of all of this. As you know, it's a fluid state and the commercial impact of that, we are making sure that it's clear to the relevant authorities on what it will be impacting us more from the food security point of view, ensuring that we can get the shipments that we need. And because the Suez Canal is open and they have become a little bit more nimble and open to having shipments from the north to the south to the Jeddah terminals. We are not as affected by it. That said, we do have an increase in containers coming from Asia. We have suppliers from New Zealand, et cetera. So there is an impact. So far, it's completely manageable within our P&L. So it's not an issue for us in the short term. If it gets a protracted issue, we will let you know and we will also indicate that for you. And then pricing could become relevant again if that would be the case. It could become relevant. It's all -- it's not an easy thing to do. Pricing requires a lot of thinking around making sure that you're doing it in a proper way. But we will come back to that.

Mohammed Al-Rasheed can you please introduce yourself and ask your question.

One question from my side, which is regarding the net profit margin of the Dairy & Juice segment for the full year, still near its historical low of around 10 percentage points. So how much of that was impacted by the shutdown you talked about on the UHT and Juice? And how do you see that evolving going into 2024?

Yes, please, Ikram you can share that to Mohammed.

Look, Mohammed, I think it's 10% that we're currently reporting. But if we were to normalize it, you can expect nearly 100 basis point difference if it wasn't for that unfortunate incident in Q3 and Q4.

Okay. And what about the possible further realization of lower commodity costs impact? Shall we expect it to go back to 12, 13 percentage points level that was recorded back 2019, '18?

Look, it will take a few years because remember, this also includes the improvement coming from Egypt and Jordan as well. So as we improve the nonperforming areas as we manage the commodity cost, which is also stabilizing. We are seeing alfalfa is reducing. We think corn is coming down. So we expect maybe 50 to 80 basis points positive impact coming from commodity easing and operational excellence. That opportunity remains. But is that realized in 12 months or 24 months, I'm not sure we're able to give a clear direction as we speak right now.

Maybe I could just highlight to all of you that what you see is not a peak in cost and then a decline back to normal, again, pre, let's say, 2019 we see a reduction of commodity costs, but we don't see it going back to levels pre-increase, pre this whole sort of inflationary pressure. So it's a little bit of a surprise to us also, but we see a rigidness in the reduction coming down to the historical levels. If that continues to expand, I think it's good for everyone. But the reality is that it takes longer than we expect to see the decreases, not to the extent that maybe -- might be in people's general perception that we are back to normal levels again because that's not the case. We are still carrying higher cost. But the real exercise we have to do, which I think was done successfully, but hard work, it was the pricing that came through and we are holding that pricing ongoing to ensure that we are getting the profitability back.

Next, we have Sultan.

Just one last question from my end. Do you expect any changes in the current subsidy scheme or the amount collected, whether in the dairy or poultry?

There's nothing that has been envisaged to us. We are now on a much lower proportion of subsidy than we have been historically which is also a little bit to the point about historical margins, they were much higher subsidy levels in the past. What we are seeing is a continuation of the subsidies that we're receiving for the import of alfalfa and for poultry. So there's nothing in particular that we can share with you. It's becoming a lesser portion. And in a way, we are -- how should I say, the less influence there is either in pricing or subsidies, the better and if you can work on an efficient market basis, so the fact that we are having less subsidies from -- compared to our history. It's essentially, in a way, it's good because we are then driving and ensuring that we are an efficient company among our peers in the markets where we operate. So nothing has come to us [indiscernible] that would change the current subsidy levels.

Next in line is Reem. Reem, can you please unmute yourself?

Reem from SICO. I just had a couple of questions regarding the poultry category. Can you please shed some light on the grant received in 2023 compared to the SAR 385 million received in 2022? And assuming this is all poultry and alfalfa related. Also, what is the current capacity within this segment? My second question is about the changes in the UHT product formula changes that were mentioned last quarter. How has the consumer response been to this change? And my final question relates to Qatar. I just wanted to ask about whether there is any possibility of selling Dairy in Qatar in the near term?

Yes. So maybe Ikram you can take the first and second question, I'll fill in on Qatar.

Sure Reem. So Reem, on the first one on poultry, the subsidy is about SAR 160 million to SAR 165 million for the year for the poultry as we speak. And in terms of capacity, today, we have around between 260 million to 265 million birds. So we are virtually close to our full capacity. But you can expect some slight volume growth because of annualization. And your second question was about the formula issue. If you can please repeat that question?

Sorry. My second question was about the UHT product formula that you had mentioned last quarter, the change in the formula. How has the consumer response been to the change?

I think Danko answered that before as well. We are seeing positive response in selected markets, but the recipe change and the communication is an ongoing process. It's not something we can achieve in a single month or even a single quarter. So it will take us at least 2 or 3 quarters to fully roll it out. But so far, what we've seen looks very encouraging.

And maybe I should highlight on the consumer testing that we've done on the new product with the new recipe, it has reached very, very good levels. And therefore, we are confident about the recipe change that we have done to achieve the right preference for the consumers. So we'll come back to that as we continue to invest and bring that into the market. On Qatar, I think I will be able to come back to you in -- when is it now? Is it in the 22nd of April when we do our Q1, we are cautiously optimistic about expanding our categories in Qatar and come back to country that has very strong recognition of the Almarai brand among the consumers. So the market is there, we know and we want to sell our products in there. Perhaps not there, it will be the first one, but we'll see, and I'll come back to you when we have clarity about what more we can do. And we are very hopeful and we are well prepared to launch into Qatar. So the moment we get green light to move ahead, we essentially have our trucks waiting at the border. So we are logistically prepared to do a lot in Qatar. And it's -- it would be welcoming for us to also include Qatar in our family of Almarai markets in all categories.

Next is Taher. Taher can you please introduce yourself and ask your question.

This is Taher from JPMorgan. There's 2 questions from my side. The first one is really on the gross profit margin. Maybe we overestimated potential impact in terms of benefits. Margins are still up maybe year-over-year. But if you look at the quarterly trend, it's a bit weird. We were still seeing some quarter-over-quarter pressure between Q3 and Q4. So I just want to get maybe some more visibility on what's happening there. And I think the key part of the question is how should we think about the margin recovery into 2024, right? I mean you always highlight that you carry quite an expensive type of inventory, but this, I'm assuming has been winding down over the last couple of quarters. So is it time for us to get maybe more bullish on the gross margin outlook as we move into 2024 and given that you've kept prices where they are?

It's a good question. But the gross margin is a component of many different variables and it comes down to country mix, product mix, commodity cost reductions, et cetera. We are also affected by seasonal business in the fourth quarter. So you see a top line that is fairly even across the 4 quarters, but you see somewhat lower profitability in the fourth quarter, and that's because of seasonal effect. So as you know, it's colder. During the fourth quarter, people tend to eat less of those fresh products like Laban that people consume a lot when it's very warm. So you have a mix issue in the fourth quarter. It's not unusual to previous quarters. So lesser gross profit, lesser profitability also down to EBIT and net income level. Despite that, we are enhancing the gross margin with -- I think it is 80 basis points in the quarter. And then on the full year, you have 90 basis points slowly but steadily, you'll get overall, when I look at all the dynamics around it, we have opportunities to improve that gross margin even further. But the variables are there and they could impact the gross margin. We look at it very carefully because essentially, that's the key metric for us in profitability at the end of the day driving the mix right and ensuring that as we are expanding, it's also important perhaps to highlight. As we're expanding our poultry business you will continue to have some costs that are not getting the full cost leverage, the fixed cost leverage of production output because that's just the nature of when you're building up factories. You will have inefficiencies until production can start. These sort of things are also impacting our gross margin and overall, our ambition to go should probably be looked at more on the long-term EBIT margin of 14%. We should be at 14%, 15% or even higher, having an ambition to go even higher but temporarily, you will see those variables come through. I'm personally pleased to see that the gross margin goes up and that we are driving it with almost 1% full year. And I think one or 2 things that are one-offs that we had in '23 will not occur again in '24. So I look optimistically about our ability to improve that margin even further but not as positive -- you provided in your estimate, I think that was a bit bold. I wish you were right, but it's not easy to drive gross margin in FMCG to the extent that you were highlighting.

Okay. And just maybe -- just a quick follow-up. Maybe on the poultry space. I mean it does feel that it's -- it's a very active space. I mean Almarai is again, going through CapEx and doubling capacity, but we're also seeing JBS announcing a facility in Saudi. BRF is exploring also setting up a JV with one of PIFs entities. So how should we look at the market 2, 3 years down the line? I think -- are you concerned around potential higher competition oversupply. So maybe if you can just shed some light on the current maybe poultry dynamics and potentially how the market will look in '26, '27 even when many of these investments start production?

No, I -- you hear it a lot, but I really mean we welcome any healthy or new competition and Almarai will support any initiative that will help achieve self sustainability in KSA at any level. And we are also looking at what this will be in the announcement that we've made. But you have to look at the investments that we are doing for the brand positioning that we're doing in the market. ALYOUM is a brand that is perceived as quality that you can trust. And therefore, we also have premium pricing on those products. We also have AlBashayer, which is another brand that drives good growth but not at the same price levels. So we have the price panel that allows us to compete with competitors in different segments. If it's AlBashayer, it could be even a new brand that we put in, but then ALYOUM being our hero brand that we drive with a brand equity that is so strong that we currently are not able to produce according to the demand. And that, to me, is the best testament for a good consumer goods market, where you have people who are not only communicating the differentiators for ALYOUM. But actually, underlying, we do have quality that we trust for the sale of our poultry products. It's a very intense market at the moment with a lot of competitors, and you need scale to survive its low profitability levels. If you're only dealing with poultry per se, the benefit of using the fixed cost leverage with Almarai and the fact that we have combined efforts with support functions to not only poultry, but also dairy and any other categories makes us feel that we are able to maximize the optimization of, let's say, the cost efficiencies for poultry. So all of that combined, I think sometimes when you have strong market share positions, you want to drive the category and the consumption of poultry in the Kingdom even further. So competition is not bad in that respect. It's good to see. And we welcome anyone who wants to bring up and increase the category consumption in that area. The competition is very fierce at this point when you're notwithstanding any entry from foreign investors, and despite that, we are seeing very good development of our fresh poultry and the extensions that we are doing on different -- if it's marinated or if it's extensions on ready to buy, ready to eat, ready to produce, all those extensions are going very well. And I think it bottoms into the fact that we have very strong brand equity and people trust our products. Ask yourself or people in the call and you go to the store in [ longer ], do you prefer to buy ALYOUM over others. And what we see in a consumer test is that people are preferring our products. And that's really the testament of consumers' willingness to buy. Did I give you an answer that you can live with for now?

Next in line is Duaa can you please introduce yourself and ask your question. Are you there? I guess there's some technical difficulty, if she's not able to ask a question. And let's move on to the next participant.

Please go ahead. I see that we are going over 1 hour mark here, but we are happy to take another...

Mr. Varun please introduce yourself and ask question.

This is Varun Kumar, I am from SICO Asset Management. I had 2 questions. The first one is related to -- there was a recent, I think, News article referring to change in the government policy towards alfalfa farming in Saudi Arabia. I just want to know whether this will have any bearing on you from the point of view of supply as well as pricing. And secondly, what is the outlook for the alfalfa subsidy right now? I think there is -- when the subsidy was adjusted back in, I think, 2016 or '17, there was -- it was until a certain period, I think 2023 so is there a clear outlook of how much subsidy you will get? Has there been any change? That's what I want to get clarity on.

So on your first question about the recent announcement from the government about alfalfa in Saudi, I did answer that question before quite comprehensively. So in short, we are not seeing scalability. There's no clarity on our end to do anything in Saudi Arabia at this point in time. It's too small and it's not intended for alfalfa. Alfalfa is a rotation drop in some farmers, and we need it for [indiscernible]. So it does not have yet the clarity that we need to see where it will come. So we are waiting for more information on what it would mean. And until such time, there is no plan, no indication to us of changes in the alfalfa subsidy that we are receiving, given the fact that we moved our farming from Saudi Arabia to different locations outside Saudi Arabia. As long as that continues, we expect subsidies to continue as well. And maybe those 2 questions are combined, but we will have to wait and see what else comes, [ more ] clarity on what it actually would mean. It does not have the scalability that we would need in Almarai to make it viable.

Yes, now there are a few questions in the chat. I'm just going to read them out. The first one is from Abdullah AlSaad. When should we expect lower inventory cost to kick in and reflect the lower commodity prices?

It's a difficult question because there is not one answer depending on what inventory you have. But if you think about alfalfa, we have security stock for about a year to make sure that we don't run out of any particular availability and supply dairy heard. On the other hand, we have fresh products that only have 30 days or 60 days and consumptions of corn and soy just have a different rotation in terms of inventory. So the share size of Almarai, unfortunately creates this lagging effect, and you'll see that still coming out in '24. But the reality is that the tip of the iceberg, I mean we are on our way down now. So we are seeing continuous reduction from the high cost that we were carrying. But it still takes, I would say, Overall, if you look at overall Almarai will still be impacted in '24. It will come less and less, but we do not have the churn given our size and our vertical integration that would immediately catch these benefits because of the inventory we're carrying.

Okay. Thank you. So thank you, everyone, and thank you for the Almarai team. If there's anything Danko that you would like to talk about as a closing remark. Over to you.

No. Thank you very much, and we leave our year 2023 behind us. We are very excited about moving into 2024. Please remember now that we have Ramadan coming with 9 more extra days and what that all means in terms of comparators. Will meet again, I believe, as I said, on the 22nd of April, when our first quarter is over. Hopefully, everything is ready and done with Ramadan. Look forward to talking to you then. Thank you very, very much, and have a great morning or a day or afternoon or anything. Thank you. Goodbye.