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

Ladies and gentlemen, good day, and welcome to Apex Frozen Foods Limited Q1 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Chowdary Karuturi. Thank you, and over with you, sir.

Thank you. Good morning, everyone, and thank you for joining us on this investor call for the first quarter of FY '24. With us on the call today is Mr. [indiscernible] from our finance team and Stellar IR Advisors, who are our Investor Relations advisor. 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. Let me begin by going through the numbers for the quarter first. So the net revenue came in at 2.5 -- sorry, INR 253 crores and grew by around 20% quarter-on-quarter in line with the seasonality factor where usually the Q1 and Q2 has -- whereby the volumes has grown in 3,447 metric tons, which is a 21% quarter-on-quarter growth. In comparison to the same quarter of the previous year, there was a volume decline of 8% year-on-year and realization decline of 14% year-on-year to INR 697 per kilo -- per kg exported product. This can be attributed to a high base with regard to the Q1 of FY '23, which was also a highest for the quarter. But importantly, due to the subdued demand from our key and main market USA. Just to reiterate, on the balance sheet side, our debt continues to decline as we [ judiciously ] -- as we use our surplus cash flows to deleverage our balance sheet. Our working capital cycle too is seeing good improvement. The achievement underscores our commitment to improving our financial health and of course, underscores our prudent management of resources. With regard to the demand centers from our company, the U.S. food at home inflation and food outside core inflation numbers remained pretty high. This had a dual impact, the demand fell while the retail prices remained high, causing inventory buildup at distributors and stores. Based on the customers, we understand that the promotional activities by retail and food service companies are being carried out albeit gradually to reduce the high cost inventory that they were carrying from the past. So we understand that the situation is easing slowly and should be better in the next couple of quarters, at least towards -- by the end of the calendar year as we look forward for the holiday period. Hopefully, the consumption also would be improving during that time for the holiday sales considering that most of the lower-priced products are available at the disposal for the consumer base. Once the inventory backlog is cleared, which is in the process, and we are cautiously optimistic that we should see a revival in the demand. As a result of the slowdown in USA, our exports to China increased and therefore, our overall realizations saw a decline since the margins on our Chinese exports are relatively lower considering the nature of the products that we ship to the market -- Chinese markets, right? And our exports to the EU continued. However, just like more developed markets, there is still some hangover of the inflationary pressures. However, we are -- have been working and we have been quite reasonably successful in growing our sales to the EU market especially locking in some contracts with supermarket chains who were not there with the company in the earlier years. So we are also -- this in a way also is the result of our focus to diversify our markets too. So that we are working in that direction and definitely up, yes, we definitely cater European markets -- and European countries market as well as the United Kingdom market for us is the key markets for us. And we're slowly seeing steady growth there in terms of [ market ]. At the global level, of course, [indiscernible] supply -- shrimp supply continue to add some pressure on realizations. However, from a competitive positioning perspective, India is still ahead, both on costs as well as value added products we are hopeful that this combination of factors eases out over the next couple of months. And we should have a better second half of the year, of course, subject to the supply situations with regard to the stocking at the ponds and also the [ immediate ] shrimp supply. To address these challenges and of course, to ensure the optimum utilization of our facilities, we have taken steps to explore the new markets, which I have just explained mainly focusing on markets outside USA and focusing more on the Europe and U.K. market also. This strategic move will not only diversify our revenue stream, but also enhance our [ servings and selling ] in the face of the market fluctuations. However, it's important to note that while we are entering these new markets, we remain cautiously optimistic about the overall market scenario. This applies to both demand trends and supply of raw shrimp, which I just explained, especially considering the complexities surrounding shrimp production in India. In conclusion, while the past year has presented its share of challenges, we remain committed to adaptability and growth. We are actively navigating the various market dynamics by expanding into new markets and working on improving efficiencies of our operations. And thank you very much, and I now open the floor for the questions. Thank you.

[Operator Instructions] The first question is from the line of Yogansh Jeswani from Mittal Analytics.

Am I audible?

Yes, please.

Sir, we have been working on expanding our RTE capacities at 5,000 metric ton I think in one of the presentation slides it's mentioned, end of May '23, it got commissioned. So could you just share a little bit more about on this in terms of production that we saw during Q1 or the entire production of it will get streamlined from Q2 for the year FY '24? How much are you expecting to do.

As you mentioned and it is the fact that we have commercialized the production during end -- towards the end of May. And almost in June, we started the commercial production. The impact of that, of course, is more to be effective from Q2 onwards. And in the present scenario, where the markets are and that we have emphasized in the past, too that our focus definitely will be to utilize that capacity in a much optimum manner even if it means that we -- I mean, in the reduced market scenario, we would definitely focus on utilizing the capacity more. And typically, the RTE products mainly to and actually majority, almost all of it -- those into retail and supermarket only. And it's very, very...

Sir sorry to interrupt you, but we are losing your audio.

Sorry, can you hear me now? Hello?

Yes, sir.

Hello? Yes. So the RTE products are mainly taken by the retail markets or supermarkets, and it is less by restaurant chains or food service markets. And with that, we are actually working with some of the retail markets very carefully to ensure that we lock the RTE products for the sizes which we have available in our supply market. And we are confident of using them. In fact, as I said, the focus is also to use that mostly even in the reduced scenario, we want to do. And that is how the present situation also is that the orders what we are taking are mostly pertaining to RTE thereby we can increase not only the production of those and not only utilizing the capacity, but also we expanded capacity the additional 5,000 total 10,000 metric ton capacity, but also earning better value for that product or product for the production whatever we are doing. And yes -- and we are also now more confident we just understand that the EU market also is opening up because in context to RTE for the past three years, we were disabled literally. We were handicapped to supply to the EU market. And now we have some positive news that they are going to improve our new facility too. So that way, that is very positive news for us for our company as such so that we can also tap that market, which even though it is our next biggest market after the U.S. we could not do any of the RTE. So I think both of them our capacity coming into play as well as this new market opening up positively very soon. is going to help us in utilizing the RTE capacity of 10,000 metric tons to an optimum level of at least 7,000 to 8,000 tons in making -- going forward. That is the optimum utilization at the best and we look forward to use it in phases based on the market conditions and our core supply also.

So the approval that you just mentioned about on the European Union markets. Any time lines on that? By when do we expect to get these approvals?

We were actually building for the past two years between actually more than two years. But we just had a report which got released from them and the EU. We got information that they have seen the positives of the systems in India, and they are now better conference with regard to the Indian facilities. And thereby, we understand that they are going to approve all those new facilities, which have not approved since end of 2019. So we -- until last year, we didn't have any clue, but now once the report is out from them and we expect them to go through that process very soon. And now even we are also pursuing with the Indian government. I think hopefully, before the end of this Q2 or in the early part of Q3, we should have that. That's what we are positive very much more positive now than earlier because after the latest report from the Indian health authorities has come up.

Okay. Broadly, we have to think about it in terms of the Indian industry, how many players would you think would have an approved capacity from European Union? Are those numbers too few and that market is just opening up or there are fairly bigger players who have?

No, no, see, the market has -- has been there all the time. It is our existing customers who are currently sourcing those products from some other countries, some of the nations as Vietnam or Indonesia or some extent from Bangladesh, for example, they have been doing that. And they were looking forward for our products like they already buy ready-to-cook products from our company, and they also wanted to add the RTE products also from us. because they know that we have the certification processes, and we have a consistent relationship which we have built with them. Unfortunately, because of the pending regulatory approval process, which was and -- like hanging are between the two governments India and EU commission that got stalled. And both the customer as well as the various customers in the EU as well as our company we're eagerly waiting for this to get over so that we could also get these products because currently, we are already delivering to all the retail supermarket requirements. And we started adding more, but we were severely handicapped with regard to shipping out [indiscernible] products there. So the market was already there. So it's not like it's a new market which is being created. But with our competitiveness in general and also the consistent quality, which our company has and dependence of our customers our products and the confidence which they have in our products. We are working with them. And it's not like it's a new market and we are tapping up something new, that market is already existing. How we grow it once we start supplying with the customers is altogether a different topic, but that market is already there in the EU and currently the supermarkets are already holding good products, really to from other markets -- sorry, other supply...

I agree with you said that European market increased. What I meant to ask was in terms of Indian suppliers, how many Indian facilities would be out there who are approved by European an for RTE products? [indiscernible] supply?

We are ready to meet, I think maybe almost around 40 to 50, maybe I'm just giving a ballpark number, but they were there even before 2019, but it just depends on where the suppliers or the processing facilities are focused on. So a significant part of these facilities are focused on I remember the are located all over India, and it depends which market they are focused on is they are mainly focused on U.S. or also some of those facilities produce mainly the [ seacat ], which they produce as [indiscernible] shrimp for other markets like Middle East or Europe also. But when it comes to aquaculture products from Vannamei Black tiger to a certain extent. I think almost now currently, there should be around more than 50 also already facilities. But it's just that different facilities are focused on different markets. different export markets.

Okay, sir. And sir, one last question and I'll get back in queue, if you look at the trend of last couple of years, we did see that in U.S. We faced extensive high competition from Ecuador and we did lose some market share to them. And our expectation as an industry was that as and when the China market opens up, Ecuador business will shift back to them and the U.S. business will be coming to India. So are there any signs of that happening? Or are we still seeing that Ecuador is giving us good competition in U.S. given the fact that demand is still low and prices are still very competitive?

The thing is, Ecuador is supplying and they have increased their production beyond 1 million metric tons of raw material, which is, I think almost looking at 1.2 to 1.5 million metric tons this year, that's what we hear from various articles published. At the same time, we did expect that once China opens up Ecuador will be looking to go back to China, and it would be -- that we will be -- we will have more space in the U.S. But the way things are -- focus is now less of how we are going to beat each other on competition basis, but the focus is more of promoting and increasing the consumption of shrimp for which in the recent past, there have been discussions happen of global marketing effort between the company -- sorry, countries of Ecuador and India and other Asian countries to, the idea is increase the shrimp consumption now given the new lower cost at which the product can be purchased. And when we are comparing the amount of consumption, which is happening per capita with regard to meat and poultry and where we are placed. Earlier, the pricing was quite high, I think something last year now with the shrimp supply coming in on pricing also softening. There are discussions to actually put a joint marketing effort to overall increase the shrimp consumption. Of course, there have been -- I mean I'm just answering your question directly because there have also been discussions about increasing India overall, but it takes a lot of time for India but other countries which are already existing consuming, it is definitely, that can be looked at. So when it comes to China, they are also actually sitting quite good inventories. And by the way, most of the inventories in which I had also mentioned in the opening remarks, which are the most of the importing markets U.S., Europe or China, they are definitely all high priced products. which you need to understand that none of the distributors or the importers or the sellers of such products in those markets are willing to just reduce the prices because there is a new flow -- the flow of newer products which is coming at lower pricing is available. So definitely, the inventory which are there very concerned and they are as the inventories are getting clear, it helps. Second thing is the inventories, which all of them -- most of them are higher priced. And definitely when the higher pricing increase are getting clear, the space will be created for new products as well as when the newer product is coming at a lower pace, whether it is from India or Ecuador or whichever country, definitely, that is going to support. And added to that, these kind of joint marketing efforts, which are in discussions and hopefully, they take place the support and contribution of all the different producing nations. Overall consumption of shrimp is our current focus. We are looking positively at that part. But in China, currently it's still kind of slow. And as Ecuador did shift a little bit to China [indiscernible] their opening. But overall, as we mentioned -- as I mentioned earlier in the opening of remarks, the inventory levels were quite high. And as they get consumed, we should see a better space available in all these markets going forward in the next few months. At least that's what we expect the time between holidays towards the end of this year and when it comes to China more than the holiday is the Chinese Spring Festival, which is around February, which is a big time period for consumption. So that's what it is.

That is really helpful, sir. And just one last thing. On the overall strength industry, typically, Q2 is a better quarter for all the shrimp processors. So going forward, do we expect some improvement in the business? And how is the overall cropping deal [indiscernible] this quarter? And what's the trend like?

In the Q2, generally, like you said, because, as you know, keeping aside quarters of the Indian financial year or the general calendar year typically, the topical permit and the period of May, June, July, August typically are a good time for production to happen. That is why, historically, we always see Q1 and Q2 and typically, the first half of the year, the better performance period during the financial year. That's what we see in our industry. And in this year, However, Q2, there are some issues which we kind of foresee with regard to supply. The stockings have been kind of not aggressive like they have been in the past. Remember always that it is the demand which motivates the supply, right? So naturally when the demand is slow or it has been kind of growing at a slow pace. Definitely, that will also have an impact on how the supply is made or made available or created. So definitely, the slower demand during the end of last financial year and during the Q1 of the current financial year does have its impacts or ramifications on how the supply is being made available. And we do see that there are farmers who have been going for stocking the delayed rains or rather delayed monsoon in the South of India also gave us a good supply continuously for the past two to three months, at least 2 months, especially. And the size were also growing bigger sizes, which have been made available, which was not the case earlier because of the dominance of Chinese demand in the past. So most of the farmers are focused on smaller sizes, which is not the case now. They are also focusing on medium and larger sizes, which is a big change in the approach and the attitude of the primary producing community. And so in the Q2, however, we see that there could be certain issues on the supply side as the stockings are not the same like work in the earlier year or the past few years because of how the demand has been. But definitely, the farmers or primary producers who have been consistent in their activity have been stocking. So that way, we are okay, we expect product to be there for sure. But -- I mean would you say that we will be seeing numbers or same volume over like what we did in the first half of last year. I mean that the fact that is a fact, actually. So definitely, it'll be a little bit subdued in relative [indiscernible] simulation to the demand. The demand -- the supply moves in tandem to the demand. So that is the current status.

[Operator Instructions] Next question is from the line of [indiscernible] from [ MES ] Capital.

I wanted to understand the dynamics for the shrimp sector as we've seen labor charges going up and so has been the feed prices. But on the other hand, the selling prices have been going down. So where do you see these trends reversing? And what are the projects that we have done?

In the current year, of course, as we have been giving a conservative outlook, we did plan in a big way for the current year in the late part of last year However, with the way all the inflationary pressures coming in and all the issues which have been happening in overseas markets. the demand definitely affected the selling prices naturally and the demand, should we say, was it a slowdown of the demand or whether it was more supply and more products made available there by basically the demand did not pick up or rather it did not go on par with how the supply was being made available for various reasons and multiple factors, whether it is the stoppage of the money which people were receiving in markets with U.S. from the government post-COVID whether it is those factors like that or whether the supermarkets and other food service chains were having inventories of other more expensive products like crab and they were more focused on promoting those products. Whatever, at the end of the day, it did affect the demand of our products, [indiscernible] products, definitely for multiple reasons. Now when this has happened, definitely, our pricing has come down. Now when it comes to the production side, we wouldn't be able to comment much of the feed prices that you just mentioned there. But when it comes to labor costs, of course, we are focused on how we produce efficiently and we manage our costs to the best positive. And given the scenario, the biggest affected party in the whole supply chain in the current, say, market trend is the primary producer, the farmer, definitely the primary producer is the one who has been at least having the most part of the margin on the entire supply chain. And their margins would get affected definitely. And we are also rationalizing their costs and [ bringing ] down the way they are changing their strategies, which we did explain in the earlier com calls too that as the market demands each of us, whether we as a processor and exporter or whether it is the primary producer, we all had to look at our costs and kind of bring that to a lower level. whatever we can bring down, like so for example, if the stocking [indiscernible] at the pond level is coming down, naturally, the energy requirements or the amount of feed is used or the labor, naturally all that will be coming down and also slowly Indian -- sorry, then the costing actually, of the labor actually could really decrease significantly. Already some of the farmers, primary producers have already moved to automated feed ways and all that and which is, by the way, very dominant in countries like Ecuador. India also has been moving, but quite slow in that direction with regard to automation and reducing -- sorry, depending less on manpower. We can't 0 the manpower, but it could be there. And same is the case with regard to processing, we do bring in newer equipment to produce the products in a much efficient manner, just not freezers and [ cookers ] also the material handling equipment. So the idea is that we can have any sort of inefficiencies due to the manpower and thereby increasing our cost to mitigate that we would be focusing on these sort of measures. And as the demand picks up, definitely, the unit -- even though the farm gate prices also will be picking up. But for now, everybody has been come to an understanding that this market is to be maintaining at around these levels for the near future. So thereby, within that market scenario within those pricing, within the farm gate whether it is a primary producer or we as a processor that we are working on in bringing down our costs. And if you see our costs actually have come down, I don't -- the reason being we did have earlier, we used to have a lot of casual workers also who were there and now we have minimized those workers and whoever are there. And we are trying to do better with lesser number of people, otherwise, we cannot bring down our cost because you pointed out the cost of labor. So it has not increased significantly, but at the same time, we are also focused on bringing out better efficiencies out of them. So thereby, we can kind of keep the cost to a reasonable level. But we still have to look out for an increase in the demand on the -- from the overseas markets. Until then, we'll have to carefully plan our production with the current infrastructure and manpower available with us.

Sure, sure. Fair enough. Fair enough. My next question sir was in terms of is Russia emerging as a big market of -- for us to export shrimp. I'm asking this [indiscernible] , I think a few months ago, we had some reports where Russia's [ XYXY ] group was looking at importing 8,000 tons of shrimp. So in Apex looking at Russia as a big marker, if yes, any news on that?

Yes. In the case of Russia, there are certain issues with the post Ukraine war and in the present crisis with Russia. But yes, there have been inquiries from Russia. But at the same time, the way the payment terms work, we did not really go for it in an aggressive manner. And one company saying they want to say they -- are likely to buy 8,000 metric tons. It's basically over a period which they focus on 8,000 or somebody says 5,000 tons, it's over a period. And it all depends on how markets react and which we all know in today's inflation is everywhere in all the areas. So I don't know how well they are actually reacting to the market conditions. But currently, we are open, and we have been discussing with some players in Russia. But we have not made any great strides with regard to grow in the Russian market. However, when we compare it, that's why our focus was more on the Europe side. And now we are also having some east European countries, which have been sending more enquiries. But major importing markets for shrimp products will be USA and China and followed by you EU, These will be the will be the major ones. And just all of them -- I mean for volumes, what we thought our company speaks if they wouldn't -- the other markets wouldn't be a significant market as such, but still we are not -- we are focusing to diversify. We are not leaving any markets untouched. As I said, I mentioned even Europe we are looking at where we can be a decent or reasonable volume if not very high volumes. So we are -- we have been approached and we are also making establishing contacts. That's how we are working on I mean you mentioned that your kind of responded with regard to eastern European countries.

Sure, sure. My last question, sir. I mean have you seen incrementing market share gain at a global level. See, overall, we understand that the demand shortage that has happened. But have we overall -- on an overall basis, have we gained market share, and you can give us a statistic in terms of what is our market share on the global side?

I'm sorry, your question was related to India growing its market share. Is that what you said?

No, sir. At a global basis, what has been India's market share? That was the first question. And have we seen any incremental growth of India's market share going up at a global basis. My next part of the question was, what is the market share of Apex at a global basis?

The first question, India's market share did not grow because you also need to understand we got staggered down at 1 million or lesser metric tons of production, right? And parallelly, when you also hear that producing nations like Ecuador are increasing 1 million or beyond 1 million, 1.2 million, 1.5 million metric tons. The question of India increasing its market share actually does not arise. There are only two ways which increase our market share. Either we increase our production, thereby, we supply to existing nations as well as other -- sorry, existing markets as well as other new markets. Or the other way is the rest of the players in the world, other producing nations fall down in their production. Now in our case -- I mean, sorry, in the present case, what you -- we are all aware is that Ecuador has been increasing its production and whereas our production kind have got stagnated or rather quite saturated at a certain point. So the question, increasing our market share doesn't really take place. That is to answer your first question. We have, in fact, point here is to maintain the current market share is the key aspect. That is the immediate requirement where one of the earlier -- I think the earlier participant has asked whether we are actually -- how do we ensure that our market at least maintains so because that is more key, especially when you have a country like Ecuador increasing its production. So that is one part. Second part is regarding the company when you asked, it will increase our market share. Our volumes overall have dropped compared to last year's quarter. And this year, supply is also kind of slow and overall demand is low. But however, because, say, our primary customers in the U.S. have been slow or they have not really purchased much from us. We did not stop there. So we actually -- of course, we might be realizing as a value and we might be having lesser margins than we do some products or baseline products to markets like China or rather we do the medium-sized products to European market. We are still moving -- diversifying so that at least our fixed costs get absorbed. That is the background where our market share to countries like EU and U.K. have been increasing even if the U.S. market share has fallen down for us. So I'm just -- I think I answered both of your questions, both in the perspective of the country as well as our company.

[Operator Instructions]. As there are no further questions, I would now like to hand the conference to the management for closing comments.

Thank you. so thank you very much to one and all for making in to our call of the Q1 FY '24. And we thank you for your patient hearing about the updates. And for any further queries and verifications, you can always reach out to us on IR e-mail address [email protected]. And thank you one and all. Have a nice day.

Thank you very much. On behalf of Apex Frozen Foods Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.