Apex Frozen Foods Limited (APEX) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Apex Frozen Foods Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Chowdary Karuturi (sic) [ Karuturi Chowdary ], Executive Director. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and thank you for joining us on the investor call for the first quarter of financial year 2023. With us on the call today is Mr. Durga Prasad from our finance team; and Stellar IR Advisors, our investor relationship advisers. We have uploaded the investor presentation on the website of the stock exchanges, and we hope you have had a chance to go through it. As we have been updating you over the past few quarters, apex was done with its CapEx cycle and with the 29,240 metric tons of home capacity, we are ready for the next phase of growth. The COVID pandemic, followed by the equipment crisis regarding the logistics container issues and then the war in Ukraine had an Halloween effect on our business. We are happy to report that most of these challenges are now seem to be behind us. In the first quarter of this year, we witnessed revenue growth, backed by growth in both volume and realization. The total shrimp sales in Q1 FY '23 grew by 16% year-on-year to 3,761 metric tons. And the average realization stood at INR 813 per kilo, which was higher by 20% year-on-year, backed by improved product mix mainly and the firm shrimp prices globally. And of course, the depreciating Indian rupee, which has helped us to a certain extent also. The share of our higher-value Ready-to-Eat products increased to 25% of the Q1 FY '23 sales as against almost 21% of Q1 FY '22 sales. The 2 main factors that helped us in this performance was our ability to take care of the container shortage, which was prevailing last year, and we had ensured proper contracts with the shipping lines in advance, which we have already emphasized in our earlier quarterly con call. This is mainly to ensure that we don't have any logistical challenges to our growth, and of course, a consistent supply of the raw material during the past quarter. However, in the present quarter, of course, there are some supply-related challenges as some of the farmers had to -- producers had to make some prior premature distress harvests and also some rains, which have been affecting to a certain extent. So there are certain supply challenges in the current quarter and -- the current period, sorry. However, on the demand side, things seem to be fairly stable. And with the festive season approaching in the latter half of the current quarter and part of the third quarter. We are hopeful of improved sales, subject to, of course, supply conditions, which I just mentioned. Let me briefly touch upon some of our key markets and how they are faring so far. The biggest market of our products remains the U.S.A., followed by the European Union. As you are aware, the entire global economy is facing inflationary pressures and during these times and prices of proteins do go up, farm-raised proteins provide a good alternate. During COVID, we saw an increase in our Ready-to-Cook and Ready-to-Eat products, signaling a small shift in the market. As the COVID-related restrictions were removed, our food service market -- restaurant chain business also started improving. But along with this, we also saw an increase for our Ready-to-Eat products, which primarily go to the retail segment. This indicates that the markets -- the retail markets continue to grow for us in a consistent manner with regard to the U.S.A. business. On the EU front, we continue to see improvement on ground in terms of demand for our products. We are seeing good traction of our baseline products. The RTE products that were in the process of getting the regulatory certification is still ongoing, it is currently ongoing. So hopefully, it will be completed by the end of Q2 or by early Q3, where we hope that the EU market also will be opened to our company, and it is going to coincide with our expansion on the Ready-to-Eat capacity, too. So we definitely hope the regulatory process will get completed mostly by the Q3 of the current financial year. These 2 markets continue to remain the key for us. And while we try and capitalize on any opportunistic demand from markets like China and other Asian countries, our key focus, however, remains with the U.S. and EU markets, where we believe we still have tremendous potential, both in terms of volume growth, but more importantly, in ensuring that our product mix improves in this region. In terms of operational performance, our shrimp sales saw a volume growth of about 16% year-on-year and 55% quarter-on-quarter to 3,761 metric tons. This is by far one of our best quarters. The share of higher-margin Ready-to-Eat products increased to 25% versus 21% in Q1 FY '22, underscoring our decision to expand the Ready-to-Eat capacity from 5,000 metric tons per annum to 10,000 metric tons per annum at our Ragampeta plant, processing plant. Our capacity utilization is also including, but we still have the potential for much higher revenues from our existing facility. In terms of our financial performance, our total income was at INR 3,250 million, saw a growth of 42% year-on-year and 55% quarter-on-quarter, largely driven by volume growth and better realizations, mainly year-on-year. We would like to point out that the export benefits that were earlier reported, as part of net revenue, have been reclassified, regrouped under other income. This adjustment has been affected for the reported period -- reported prior periods as well, that is Q1 FY '22 and Q4 FY '22 and the full year FY '22. Further, the increase in export benefits, which stood at INR 137 million in Q1 FY '23 is on account of almost -- around -- approximately around INR 5 crores to INR 6 crores of RoDTEP benefit, the replacement scheme which came in the place of MEIS. The part which was accounted was only to the extent which was made available to us, with the scrips available to us during the quarter. And as we continue to -- because there have been some technical issues also with regard to the benefit being net available from the website of -- the government websites. So as they are made available, we would continue to account for those benefits under the income. Now coming to profitability. Other expenses, which are -- which were led by increased freight costs, continue to pressurize the margins, but were partially offset by the improvement in our product mix. Our EBITDA for Q1 FY '23 came in at INR 347 million, a growth of 153% year-on-year, accounting for a margin of 10.7%. Most of our other costs were in line with business growth. We closed the quarter with a profit after tax of INR 185 million, a growth of 464% year-on-year as opposed to INR 33 million in the previous year. With that, I conclude our opening remarks, and now I request the moderator to open the floor for questions.

[Operator Instructions] The first question is from the line of Lokesh Maru from Nippon India Mutual Fund.

Sir, I'm I audible?

Yes, please.

Congratulations on the excellent set of numbers on volumes' front and realization front book. I wanted to basically touch upon our earlier expectation of doing somewhere around 18,000 to 20,000 metric tons, right, basis our increased capacity utilization up to 60% for the year. So given that we have done 3,700 metric tons in Q1. That leaves a lot of burden of around 15,000 tons or so for the rest of the 3 quarters. And again, given that Q1 usually is heavy, so how do you -- how would you like put for the next 3 quarters and the sales and so on...

Yes, Mr. Lokesh, the point what you are referring to was about capacity utilization with regard to production. And yes, we did mention that we were looking forward to doing a production of around 18,000 metric tons plus. This is mainly about production. And our -- in fact, our processed shrimp was 4,600 metric tons-odd for the Q1 actually. And we were confident, of course, in the beginning of the year, for sure, on that basis. And as far as capacity utilization is concerned, it is more driven by the supply situation even though we could have a strong backup of the order book diversified between various markets. So as far as Q1 is concerned, we did do a production of 4,600 metric tons and because we did pretty good, it is the highest production we have done. And we were definitely on that path of doing that 18,000 metric tons plus for the year. But as I had also mentioned in the opening remarks, it is also subject to supply conditions and the situation, how they keep changing. So definitely, as the supply comes, we would definitely look forward to doing that production of 18,000-odd metric tons. But currently, of course, which we have also mentioned in our opening remarks, that there are -- there has been a little bit of issues in the supply side with some premature distressed harvests and also because of the rains and some flooding, which has happened over the past few weeks. So we are watching and carefully looking at how to look at -- how to do the production going forward based on the supply.

Sure, sir. Sure, sir. Understood. And sir, how is the -- basically, when you say supply -- as of now, it is only in the current quarter that you are seeing some disruption on the supply side?

Yes.

The next question is from the line of Riddhesh Gandhi from Discovery Capital.

Sir, just want to understand, given the high freight rate, are we able to pass those on to our customers?

I'm sorry, can you repeat that question?

Having given the high freight rates, just wanted to understand the overall supply situation -- because we are seeing [indiscernible], we have competitors also adding capacity. So is there -- how is the global demand in supply situation right now in procession?

Okay. First question was, are we able to pass on the increased freight costs to the customers. That was your question?

Yes.

We were able to do it until last year, of course. So that is when even the overall unit value also had increased in dollar terms. However, of course, then the market also has corrected accordingly based on the demand side overseas. And right now, the increased freight costs are already factored in the part of the sales. And as we also are looking forward because we had our first set of reduction, which was, of course, very miniscule or rather, sorry, very insignificant. We only had a reduction of hardly around $1,000 to $1200 in the last 2 months, even though the increase was in multiples of thousands. So of course, there is also a marginal reduction in the freight cost, which is not significant. But as we also look forward for further reduction in the freight costs, we believe there will be an easing of freight-related costs as such over the course of the current year. First, that is regarding the freight impact. And as far as the demand is concerned, there was, because of, let us say, disposable income increasing or because of the various support given by various governments of the respective countries, of course, the demand was also higher over the past year. And now there is the demand has been -- a little bit correction has been there. It is -- demand is still going in a consistent manner as the sales have been going good. It is just that the supply also from -- globally has increased overall. And I mean, the inventories have also been built up. And most of our customers, in fact, not all of them, but most of them have also been doing promotions on the retail side, especially at the supermarkets level. And we are positive that such promotions will only be basically -- they will play an active role in absorbing any additional inventories or supply, which gets built up during the current year. So for now, the demand as such overseas is consistent, and it has not really dropped. Of course, it's more to do with some sort of -- some extent of inventory pileup, which has been happening over the past 2 to 3 months, which were mostly delayed shipments of last year, which have all made it. And they are, in fact, increased their promotions too. So we are looking forward to the positive impact of such promotions over the next few months, especially going forward for the holiday sales, which are required. The product will be required. Yes.

Sorry, just sir, so are you seeing a slowdown in the demand as yet? Or it isn't happening because of the promotions? And then is there in turn, any pressure on pricing and margins and spreads overall?

Actually, on the demand side, there was a bit of correction in the early part of this financial year. As I have just mentioned that there was a certain extent of inventory pile up also, which had happened because of all last year's shipments reaching to the destinations because of various logistical issues, which were there, not just for our company but across the trade. And because of that, as the logistical issue leased out, a lot of pending shipments have made it to the destinations. So that means there was kind of more supply at the destination level at the destination consuming end than the demand which was prevailing at that point. That is what seems like there's been a drop in demand, but it is actually it's very consistent. It's just that there has been some accumulation of -- or rather arrival of quite a large amount of product into the countries compared to the normal situation. So that is what looks like. The demand has kind of corrected a bit and it's kind of subsided. But as such, our customers have reported that their sales are all going in a very consistent manner. And yes, of course, pricing corrections did happen already. And so for now, we are looking forward. We are, in fact, again, looking at filling our order book again for the holidays as the supply also improves on our side. Margins as such, when you say it's not just dependent on our realization there overseas, but also our supply situation here. The cost of raw material also plays a role. So definitely, we are looking forward for increase in supply also over the next 3 to 4 weeks. And we believe it will basically give us good opportunity to continue our growth plans, which we had in the beginning of the year.

Got it. But unlike given it is a food item, I'm assuming that even excess inventory ultimately will get corrected reasonably actually quickly because either have to be -- I mean, discounted or let disposed of? Or how long is this...

Well it's a food item like you rightly said, and it is definitely not among the expensive items like snow crab or lobster tails, for example. We are definitely reasonably priced. And, of course, we are not that expensive for people to move away from and move towards hot dogs or something. So it has been the shrimp consumers continue to consume. And in fact, the price increase, which has happened like a year ago, also was not so significant that it needs to be -- that it is a turnoff. And that is the reason our customers have reported that as such consumption-wise, sales-wise, the volumes, as far as volumes are concerned, they have been very consistent for them, too, which is something good to hear. So definitely, it is not very expensive, like I said, like snow crab or lobster tails. So they are reasonably priced, shrimp is reasonably priced. And the consumers of shrimp, basically shrimp being the favorite item among the seafood consumers, definitely will have its share of untampered, undisturbed market and there's no disturbance so that it will remain for sure, consistent. It's just that when our customers also provide additional promotions. The [indiscernible] are offering additional portions or additional bags, they would definitely -- increase the volume growth definitely, and it will absorb.

The next question is from the line of Mayur Gathani from OHM Portfolio Equi Research Private Limited.

Sir, when you're referring to supply side issues, what actually are you referring to. Are farmers not producing? Or is it the inflation that is holding them to produce more?

No. Actually, farmers did produce well. Unfortunately, because of some disease-related issues or whatever, they have done some premature harvests in the earlier parts of June or rather -- I mean kind of around June and early part of July, which has -- When the farmers harvest prematurely in the smaller sizes, it is always the same story goes where the medium and larger sizes of the future get wiped out from the market. And it's -- that was the major factor which was there. And also recently, the heavy rains, which had caused certain flooding area on the coastal areas, also did wash out some of the shrimp into the ocean. So we -- it's not that they have stopped stocking. Our, in fact, we are also -- as you know, our company is involved even in the hatchery side. We do have seed sales happening. It's not very significant, like it is pretty much similar like how it happens at this time of the year. It is quite steady. So farmers are restocking. There are no issues on that front. There were issues with regard to some premature harvest in the smaller sizes. And now again, as the pricing also has improved, all the farmers are really also looking forward for stocking again. Those farmers who had to do maintenance or basically do a shut down for some time to dry up their ponds, they are again now going for seed bookings, which we are already getting the news from various hatcheries.

And your average realization has been very higher compared to last year or few years. So what is the reason behind that? Because you just mentioned that there was higher supply and because of the container issue, there was higher supply in the last quarter or maybe in quarter 4. But what's the specific reason for this higher realization? Is it a value add?

No. Okay, there are 2 factors mainly. Of course, value-add Ready-to-Eat percentage, as it increases further, the more volumes we can do in Ready-to-Eat, definitely realization in dollar terms also increases. But one of the most important points for the Q4 and Q1 is also the rupee depreciation, which we cannot ignore, which has been almost like from INR 76 to INR 78, INR 79. That also helped us in gaining higher rupee realization. But mainly that for us, if we look at on a dollar realization part, it was more to do with the mixed product mix, which -- as we increase more on the Ready-to-Eat products.

Okay. And additional 5,000 metric tons Ready-to-Eat, the value add, will that come by last quarter FY '23?

Yes. That's what we were planning, expecting it to be completed by Q2 end. But the logistical challenges, which were there, same, they have delayed their shipments. And it's coming in Q3. Like you said, we will be completing. We will see the benefits of the expansion by the end of the current financial year. Correct. We will see the operational benefits of the Ready-to-Eat products capacity expansion more towards the end of the year, like you said rightly.

Yes. So we will see the financial benefits in quarter 1, right, of the next year?

Yes, more towards Q4. You can say precisely Q1. Yes, Q1 is more -- you're correct.

Okay. And your outlook for the demand, et cetera, remains strong, the supply side issue more or less are kind of taken care of, so you should have a good next 9 months?

Yes, as far as demand, as I had mentioned earlier also to the previous callers also, that demand-wise, it is quite steady. The main thing is supply. Supply not only helps us to utilize our capacities in a better manner and reduce our costs, operating costs. At the same time, they would also enable us to do more sales. So we are keeping a watch on the supply situation technically. So it's more to do with that at this point because our order book is still there. Unfulfilled contracts are there. Good amount of contracts are there. Then we are continuously monitoring the situation with our customers to ensure that our order book is in a good shape in the future.

So quarter 1, what was the utilization level, sir?

The quarter 1 was 52% of total -- approximately it was around 52%.

And Ready-to-Eat?

The Ready-to-Eat... Sorry, quarter 1 totally for 63%, I'm sorry. And in that, the Ready-to-Eat was -- and that, of course, the Ready-to-Eat, I think, 20% -- sorry, 23% in Q1 FY '23. I'm sorry about that. It was 20% for FY '22 for the full year, whereas it' 23% of the Q1 FY '23, so -- with regard to Ready-to-Eat.

The 5,000 capacity, you have you utilized only 23%.

The 5,000 tons that you -- divided by on an annualized basis because [indiscernible], right? Yes. So we have utilized the 23% of that in the Q1 -- That is Q1 percentage, 23%. Q1 FY '23, the Ready-to-Eat capacity processed shrimp was 23% of the total volume of 4,600 metric tons.

And what can we look at, what this number can -- can you achieve an 80%, 90% number on this because you're again coming up with a new expansion next year? So on the existing capacities, can we achieve 80%, 90%?

If you actually look at it, if we continue to do this, we are almost 85%. We are utilizing 85%. If we do it at the same run rate for the next quarters, we are already utilizing at 85%. And that is the reason which we had foreseen this based on the demand and our ability to utilize this capacity at a much faster pace. The decision you are thinking to add up that extra line -- additional line of 5,000 metric tons. So -- at the current run rate, it is 85%. If we are able to do this for all the 4 quarters, of course, subject to supply situation. But order book-wise, there's no issue. We are very confident. That's the reason based on the support of our customers and the feedback from them, we have decided to go for that additional capacity.

The next question is from the line of Suhrid Deorah from Paladin Capital Management LLP.

I have some really quick basic questions because I'm not very familiar with your business. So firstly, you mentioned a few times that 3,700-odd tons was the sales volume, but 4,600 tons is another volume that you referred to, which is the production volume. What is the difference between the two?

No, sorry. We have mentioned that our sales volume was 3,760 metric tons during the quarter Q1. And of course, the production -- Of course, whatever is the difference is getting -- it will be in the inventories and it gets shipped subsequently in the current Q2 and thereon, right? So we said our total processing -- process during the Q1 was 4,611 metric tons to be precise.

Okay. Got it. This is this inventory and [indiscernible] in the subsequent quarter.

Yes. I mean, subsequently naturally, we cannot -- the sales is only recognized till the end of Q1 and June 30, right? Subsequently. In the subsequent quarters -- subsequent period basically it will get [indiscernible].

Okay. My next question is that on the pricing, these prices that you mentioned, INR 780-odd is the price of the basic shrimp and, I think, 10%, 15% higher on the price for the RTE product. These are FOB prices or CIF?

They are actually CIF. Which pricing? We have mentioned...

No. I mean, I'm extrapolating the INR 813-odd realization that you...

That is CIF, of course, . Yes, it's our invoice based on our total volume of shipments for -- the total value against the total volume of shipments. That is the money which we have realized. It is including INR 813 includes freight also, fees, if that is what you're asking. It includes freight component also.

Okay. So my second question is that, globally, it sounds like demand has come back post COVID, it also sounds that supply is coming back. It seems there's a lot of inventory in the channels and a lot of material reach to the customers or warehouses. So in this situation, what is the impact on pricing option? So is $10 approximate number? Where -- how does this get impacted?

I mean just going on an example, $10 per kilo item was there. There was also -- earlier, it was at around $8, $8.5 -- $8, and it had -- this was like 1.5 years ago. And then because of various challenges, product not reaching the destinations and the demand soaring, of course, there was correction and say it went up to almost $10. And now, again, there have been some corrections over the past few weeks. And right now, it is corrected down to $8.50 to $9, so depending on the different products which we focus on and which we do. So the corrections keep happening on an ongoing basis depending on the demand/supply situation, which you are very much aware, like any other agri or like aqua product as such. So currently, it is corrected from its high of last year for sure, the current market. It is definitely corrected by almost like a $1 -- $1, $1.25 comparatively. I mean taking on a $10 item basis. I'm just giving you an example.

Right. So the impact of this reduction will be seen in the next quarter itself? Or do you have contracts in place which guarantees certain realizations to you?

We do have contracts. Now if you look at it, we will also be signing contracts in the lower values also because it's an ongoing thing. We capture sales at the different stages of the market. It is not like we would be -- nobody would be buying their year requirement at the market high. We need to understand that situation. And nobody is going to, at the same time, sell at the years' low for the entire year. So it is an ongoing situation. We also have -- we will also be taking contracts at the lower levels. And of course, as you -- since you were not in there, but I'm just telling you, based on the realization which we get, which includes all -- include the rupee position against the dollar, based on the average realization, even our raw material prices keep correcting depending on the demand-supply situation and the realization component. The prices also keep changing at the supply side. Like for the Q1, also the supply prices were also quite low. They have corrected significantly lower at that time during Q1. So they keep changing. So it's not like correction with a lower price is going to remain consistently for every quarter, but it keeps changing as the supply reduces and as the supply increases. So that is more of a market dynamic.

Okay. So the pricing is dynamic. Is there [indiscernible] Q2, Q3 will be peak season. So is it fair to say that the pricing drop after that? Or that's not the case?

Sorry, can you repeat that? I'm sorry, I didn't follow that.

Yes. You're going into peak season for festive demand in the Western world, right? So would you see pricing drop off after the season ends?

To tell you the truth, the pricing has already dropped.

Okay. So this 10% or 15% drop that you're talking about, already reflect in that?