Baladna Q.P.S.C. (BLDN) Earnings Call Transcript & Summary

Hello, and welcome to the Baladna Third Quarter 2023 Earnings Conference Call. I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Phibion Makuwerere to begin the conference. Phibion, over to you.

Thank you, Gavin. Good afternoon. I welcome you all to Baladna's 3Q and 9 Months 2023 Earnings Conference Call. My name is Phibion Makuwerere, Senior Research Analyst at QNB Financial Services. On today's call, we have from Baladna's management team, Malcolm Jordan, who is the Chief Executive Officer. We also have Saifullah Khan, the Chief Financial Officer. And as usual, management will first go over the performance and we have a Q&A session immediately after. I will now turn over the call to Malcolm to begin. Malcolm, please go ahead, sir.

Yes. Good afternoon, ladies and gentlemen. I'd like to welcome you all to the earnings conference call of Baladna to present our results for the third quarter of 2023. During this earnings conference call, we'll provide you with an update of our operational and financial performance during the third quarter. And for additional details, you can please refer to our investor presentation, which is published already on our website. In quarter 3 2023, Baladna achieved a revenue of QAR 256 million and a net profit of QAR 22 million. This represents a growth of 14% in revenue and 178% in net profit compared to the same period last year. This growth was mainly attributed to higher sales volumes due to a population increase, an increase in selling prices, a stringent cost control measures and to a degree, a normalization of some of our commodity pricing. Further, as I indicated in our last call, I'm pleased to mention that we have received a finance rate reduction by our existing banking facilities. And this, of course, will further improve our profitability going forward. Along with ongoing continuous improvement projects, we have successfully restructured our internal management team. Our leadership team recently aiming to optimize our operations through quicker decision-making processes. With our operation in Qatar in line with our previous announcement of the manufacturing agreement that we had with Bel, the global cheese and snack chain, I'm delighted to announce the start of the production of the spreadable cheese under their brand. And that product is now manufactured and will be making its way to the market in the coming days. In the context of our international expansion initiatives, we're pleased to announce the latest progress made in relation to signing a memorandum of cooperation with Suez Canal Authority in Egypt. The focus of this project is to establish a dairy farm with an initial capacity of around 20,000 cows that would deliver somewhere around 250 million liters and typically a very large annual -- very large area of land, 280,000 acres in the [ New Valley ] that we would help to develop our agri business in terms of crops. The expected investment is around QAR 1.5 billion, and this project strengthens our strategic alliance in Egypt where we already have a stake in Juhayna, exceeding 15%. Furthermore, we're delighted to report positive advances in the Algerian project in partnership with the Algerian Investment Fund, also targeting a very large domestic vertically integrated dairy operation. I think that we've already said that Algeria is the second largest importer of milk powder globally. This project is designed to deliver about 200,000 [ tons ] of milk powder to the Algerian government, representing just over [ 50% ] of their requirement. On that note, I'll hand over to Saif to continue on the financial performance. Thank you.

Thank you, Malcolm, and good afternoon, everybody. I will now provide you with an update on the Baladna financial performance for the third quarter. Baladna achieved, as Malcolm mentioned, revenue of QAR 256 million in Q3, which represents a growth of 14% compared to same period of last year. This growth was achieved through an increase in sales volume across both in [indiscernible] and HORECA and retail, driven by management initiatives to capitalize on the improving market dynamics, recently received selling prices, selling price increase also contributed to this achievement. During Q3 2023, Baladna achieved a net profit of QAR 22 million, representing an increase of [ QAR 178 million ] compared to third quarter of last year. This translates into a net profit margin of 8.7% and earnings per share QAR 0.012 for this quarter compared to earning per share of QAR 0.004 for the same period of last year. If you look at our 9-month performance of this year, Baladna achieved our revenue of QAR 773 million, which corresponds to the revenue growth of 9% compared to the same period of last year. At the same time, Baladna recorded net profit of QAR 65 million, which -- with a 16% growth compared to same period of last year. This represents a net profit margin, 8.4% and earnings per share QAR 0.034 compared to earnings per share of QAR 0.029 for the same period of last year. This increase in net profit is mainly attributed to an increase in sales volumes due to increase in population and increase in the selling price. The other positive impacts include the normalization of commodity prices as well as the ongoing savings in the finance cost, Baladna continue to pursue strategic initiatives and capitalizing on the improved market dynamics arising from the population group by focusing on reduced sales [ estate ], efficient overhead cost control practices and the development and introduction of innovative products to optimize our product portfolio. This resulted in Baladna achieving a strong EBITDA margin of 30% during first 9 months of this year, leading industry in the region in terms of EBITDA margin. In terms of cash flow generation, Baladna managed to generate in this 9 month [ QAR 252 million ] of operating cash flow and -- which shows a significant improvement over the period of last year. This represents our efficient working capital management strategy, particularly in inventory management, with the improvement in the market dynamics, normalization of material prices, strategic and efficient cost control -- and reduction in finance cost due to finance rate reduction. We expect to achieve a strong growth in coming quarter of the year. To conclude, Baladna is fully dedicated to fulfilling its -- as a market leader to contribute to the national food security program and self-efficiency program in Qatar. We'll maintain our focus on creating shareholder value, while at the same time, saving our customers to the high standards -- serving our customers at the highest standard and ensuring the safety and [ developing ] of our employees and all the stakeholders. I would like to thanks for your attention for this call. And now I will open the floor for question-and-answer session. Phibion, over to you.

[Operator Instructions] And your first question comes from Zohaib Pervez of Al Rayan Investments.

I've got two questions. Firstly, if I see your revenues from dairy sales compared to last quarter, they have actually lowered QAR 5 million. And our understanding is that the dairy prices were increased. So what led to this decline quarter-over-quarter, even though the prices were increased? The second question is on the finance cost. So the finance costs reduced significantly from last quarter. Could you tell us what led to this decline? And is this a sustainable decline?

Okay. I think your first question about dairy revenue, I think it's increasing. If you see dairy sales for this 9 months and even this quarter, is increasing. I don't know why you have seen this declining.

Dairy sales for third quarter?

Third quarter, [ QAR 351 million ]. And last year, it was [ QAR 199 million. ]

No, I mean second quarter of this year.

Second quarter of this year .

It was [ QAR 237 million ].

Okay. You are referring quarter-on-quarter. So there's a seasonality impact. Actually, this -- all this quarter 3 is on the lower side because there is an impact of because the population because people go on leave, I think, from July and August. And if you see the overall in the business, you have a farming also is high humidity and the cows have impacts. And this is Q2 because in the Q2, you also have Ramadan impact always is on the higher side. So Q3 over will have a seasonality impact.

So the increase that you made in the prices were completely offset by the seasonality and lower population because of the summer impact. Is my understanding correct?

Yes. If you look at this, if you compare our performance with the last year quarter, if you look at the last year quarter, your top line growth will reflect you where it stands. So you see the last year is compared to last year is 14% up, so which have a contribution from sale price increase and the volume increase as well. So it means the seasonality of the Q3 is the Q3 as there is always seasonality.

Right. And my second question is on the finance costs.

Yes. Finance cost. We have a reduction from the compensate this all what commodity prices went up and overall business has been big impacted over the last 4.5 years -- our profitability. And this is compensation. We did negotiation with [ other bank ] and we're able to manage some rate reductions. So this is to get the compensation of the impact on what the business have. So this is the different industries as our food security and a strategic company in the country that then be able to manage some reduction in the rates.

So this is sustainable. We should expect this to continue, right?

Yes, we should expect in coming 2 to 3 years, at least.

Okay. Could you just give us some idea of what was the rate earlier and what is the rate now?

Rate arrangement, the banks dividends, I think we are trying to maintain lower than the 3% in interest rates right now. So there's a different bank, but it's lower than 3%.

[Operator Instructions] And your next question comes from [ Osman Sundance of Seco Bank ].

I just have one question regarding commodity costs. I just wanted to understand the inventory cycle that you guys have held, how long is your inventory holding period? And how much is the lag versus the current commodity prices and [indiscernible] in your financial statements? I just wanted to understand that cycle.

Okay. Thank you for your question. We did mention many times this Baladna being a strategic company. We always kept our safety stock level high. We are [indiscernible] manage all that. We have a feed inventory for our animals. We have our packaging, we have raw materials, ingredients. So all have a different criteria that we set for our safety stock. So -- but if we say maximum, we capped our sensitive stock by 12 months and some of those goes to 8 months, 6 months [indiscernible]. We have a different criteria based on the sensitivity of the stock. What we are seeing now prices are impacting and now where we are seeing an effect in our P&L now. The benefit fall in the next year. So we expect next year better.

All right. And I just wanted to understand what is the subsidy arrangement with the government. And so if you have like told this earlier as well, but yes.

Yes. Okay. I think you are on [ the first time on call ]. [indiscernible]

Sorry, can you repeat?

These arrangements with the government is year 2027.

Yes. Is it based on the number -- dollar amount per ton of feed imported?

It's a fixed amount. And the arrangement was done -- it's year-on-year basis and now you can see the last 2 years, 2022 and 2023, more the same, but gradually, there will be a decline, and it will end up in 2027 with QAR 50 million.

All right. All right. Also on the market, I've seen very high market share, especially in the Fresh and UHT segment. I just wanted to know, is there any indication for any competition coming in the market from any other [ GCC ] players?

I don't expect the market in dairy to change anytime in the near future. We -- ready product of the Juice category moving into both the retail and the HORECA channels, that's taken small share to this point. And we expect that definitely on this stage, we will see much more of that in the coming weeks and months ahead.

Your next question comes from the line Zohaib Pervez of Al Rayan Investments.

Thank you again for giving the opportunity. Malcolm, you had mentioned that there are two investments that you are looking at, one is the Egypt investment and Algeria. So Egypt is a total investment of QAR 1 billion. When -- by when do you think this QAR 1 billion will be required? And how will you be planning on balancing that? Algeria, if you could just repeat as to how much was the total annual requirement that we provided by Baladna and will there be any investment done for this powder milk plant or not?

Yes. Thanks for the question. Let me try and step you through. If you allow me, I'll start with Algeria, just to give you some context, safe might jump in on the question around funding. But Algeria is a project that's designed to replace the importation of powder that's currently bought by the Algerian government, [ 360,000 tonnes, ] and we are working with them to look at how we can do a percentage of that in country that takes some pressure off of their foreign exchange requirements, improve their balance of payments, creates local jobs, and local economies around that and also, to some extent, protects them from -- or at least to a level of global dairy inflation that we expect to see over the coming 10 years as mostly driven by population, demand will outstrip supply, and we'll see a level of inflation there. So the way that, that project is being looked at today is that we would create a very large arable operation that would produce the crops to feed a very large dairy herd that would then -- and the milk from that dairy herd would be converted into powder and that would then replace the imported powder. So that's kind of, I guess, what the project looks like on the ground. We would attempt to do that in three clusters. We're working very closely with the Algerian government on creating a framework agreement that would help us to roll this project out in the right way. The investment is in the region of USD 3 billion to USD 3.5 billion. We expect that it would take us somewhere between 10 to 12 years to reach the full extent of the capacity. So it's very significant. It's extremely ambitious, but I think that we're moving very much in a positive direction and that we hope from a timing point of view, I'm expecting within the next 2 or 3 months, we have this signed off and we can move to the next phase. Saif, if you want to mention about funding.

So funding remix, again, as what Malcolm mentioned, is still this project in the framework space and we are formalizing our [indiscernible] condition with the government of Algeria. So plan is that projects should have a direct funding locally in Algeria by minimum 65%. And the rest will be equity shared based on our shareholding with the Algerian government and Baladna. So at the moment, we are expecting [ project ] QAR 3.5 billion, QAR 3.6 billion total over the period of 10 to 12 years. But in year terms, year-on-year, it depends on the cash flow of the business plan and it looks that business will generate after -- into the operation after third or fourth year, the positive cash flows, and this will depend on year-on-year requirement of CapEx. And gradually CapEx will be reduced initially, you will be needing more cash flow from that and equity contribution. But gradually, when business will be cash positive, business will meet its own requirement.

Okay. Thanks, Saif. And just in terms of Egypt, Egypt is a little bit behind Algeria in terms of where we are from a project perspective, but that project is a very similar amount of land, 113,000 hectares, more or less. And I would say a modest dairy operation where we would look to sell the milk into the Egyptian market or maybe to our partner or are already there. It's smaller in scale. At this stage, we expect -- that we have teams currently there on the ground working through the details on this project, and they will come back and report next week. But that really -- we will create more crops in this case than our dairy herd would need. And then that would move us in more and more into an agribusiness play in Egypt.

So this would be the same order we have because this is very initial stage, we will be trying to see more of -- in Egypt as well. So what we will see later on, what exactly the numbers are and how much we can range locally there and how much equity contribution will be from Baladna. I think Zohaib your question is answered, yes?

Just a follow-up on that. So how long -- what would be the time lines like until we see some filtration in these projects? 2 years, 3 years? Any idea on that?

Yes. I think -- look, I think in a sense of -- I would expect that if we -- from when we signed the deal, from when we get it approved by our Board and signed the deal, then we're probably looking at somewhere 2 to 3 years before we are actually in what I would consider to be an operating phase rather than preoperating by the time that we prepare the land, produce the crops, build the dairies, import the cows, get the cows to the point where they're milking and they have feed and so on, I would expect that it's to 24 months plus before we see something in our operating phase.

There are no further questions at this time. So I'd like to hand back to Phibion.

Thank you, Gavin. If we do not have more questions, I think it brings us to the end of our call today. Thank you for joining us. I would also like to thank the management team for engaging with investors. Please join us again for future Baladna earnings conference call. Have a good afternoon.

Thank you, everyone.

Thank you.

That does conclude our conference for today. Thank you for participating. You may now all disconnect.