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

Hello, everyone, and welcome to Baladna conference call. [Operator Instructions] I'd now like to hand over to our moderator for today, Phibion. Please go ahead.

Thank you, Ellie. Good afternoon to you all, and thank you for joining us for Baladna's 2Q and 1H 2024 Earnings Conference Call. My name is Phibion, I'm an analyst with QNB [Audio Gap]. On today's call from Baladna's management team, we have Saifullah Khan, the Chief Financial Officer. And as usual, you go over the performance in the presentation. And we have questions immediately afterwards. I'll now turn over the call to Saifullah.

Good afternoon, ladies and gentlemen. I would like to welcome you to earning conference call of Baladna to present the results for first half of 2024. My name is Saifullah Khan. I'm the CFO of Baladna. During this earning conference call, I will provide you with an update on Baladna financial and operational performance during 6-month period ended 30 June, 2024. For additional details, please refer to our investor presentation, which is published on our website, in case you not received it. So in the first half of the year, Baladna achieved revenue of QAR 595 million and net profit of QAR 100 million. This represents a 100% increase in revenue and remarkable 137% rise in net profit compared to the same period of last year. Notably, this is the first time in Baladna history that we have reached the milestone of QAR 100 million in net profit within the first 6 months of the financial year. The revenue growth was primarily driven by increased sales volume across all channel and products category, favorable market conditions and continued gain in market share. Earnings per share for the period was QAR 0.053. The significant increase in net profit was primarily driven by the enhanced gross profit margins achieved through operational efficiencies in entire value chain, coupled with strategic and efficient cost control measure. The gross profit margin for the first half of the year improved to 24% from 20% in the same period of the previous year. In addition to these margins' improvement, reduced finance core and stringent control over general and administration expenses contributed to significant to the strengthening the bottom line. Regarding EBITDA margin, as illustrated in our presentation, Baladna leads its industry peers with a margin of 33%. In terms of cash flow generation, Baladna continues to emphasize effective working capital management and has implemented stringent control over capital expenditures through the various investment analysis and robust business viability assessments. For the 6-month period, the company generated free cash flow of QAR 198 million, which has enabled us to finance dividend payment through internally generated cash flow of the last year. In the second quarter of the year, Baladna recorded a revenue of QAR 282 million, reflecting 7% increase compared to the same period of last year. Baladna reported a net profit of QAR 52 million for this quarter, demonstrating a substantial increase of 134% compared to the previous period. Earnings per share for this quarter remained QAR 0.027. This quarter, Baladna has achieved a historic milestone by passing QAR 50 million in net profit for the first half. This exceptional performance underscores our continued growth trajectory and reflects our strategic focus on delivering value and operational excellence. As illustrated in the presentation, our market share in the fresh milk category has surpassed 95% and with UHT also exceeding 90% mark, our ongoing focus remains steadfast on expanding market share in other products category that offer substantial growth opportunities, ensuring sustainable growth for Baladna future. Baladna remained committed to enriching its product portfolio through continuous innovation and the introduction of new offerings. In the first half of the year, we have made notable advancements, including our entry into the high protein milk market and successful expansion of Greek yogurt portfolio. Additionally, we have relaunched our juice line with the refreshed design and new flavors to enhance the consumer experience. The Awafi product range has also been revitalized with the distinct brand proposition, Every Day Value, Every Day Quality, featuring a new packaging identity across the entire portfolio. These strategic initiatives underscore Baladna dedication to delivering superior products, adapting to evolving consumer preference and contributing significantly to the country's food security. This exceptional performance is attributable to our relentless focus on driving continuous improvement and operational efficiency in our farming, manufacturing and sale operations. On a daily basis, our farms consistently supply fresh milk, while our manufacturing facility diligently produce high-quality, nutritious products, all while maintaining an impeccable record with 0 quality complaints. Our sales team is equally committed to ensuring the entirely delivery of fresh products that meet the evolving demands of our consumer. Regarding latest development on our Algeria project, I'm pleased to report that the project is progressing as per schedule. Groundbreaking activities are anticipated to begin within the next few coming months. Currently, we are finalizing the necessary legal documents with relevant stakeholders. We will continue to provide regular update on the project's progress to our shareholders. Following our robust financial performance in the first half of the 2024, Baladna projects a positive outlook for the remainder of the year. We are committed to maintaining this momentum by expanding our market share and existing product line and launching new offering, coupled with favorable revenue growth indicators, the stabilization of material prices and the annualized benefits of reduced finance cost. Our continuous focus on operational efficiencies and excellence is expected to derive strong bottom line performance through 2024. Baladna's strategic expansion beyond Qatar remains pivotal to our sustainable growth objectives. While our primary focus is on advancing the Algeria project, we are also dedicated to broadening our diversification strategy by actively evaluating new opportunities within Qatar or outside Qatar. To conclude, Baladna remains steadfast in its commitment to serving as a market leader and contributing to Qatar National food security and self-sufficiency goal. We are dedicated to delivering shareholder value while upholding the highest standards of service for our customers and ensuring the safety and well-being of our employees and stakeholders. I would like to thanks for your attention, and we are now open to any questions if you have, please.

We are now opening the floor for question-and-answer sessions. [Operator Instructions] Our first question comes from Zohaib Pervez from Al Rayan Investments.

I've got 2 questions. Firstly, on your gross margins, they have expanded very strongly in the quarter on a year-on-year basis and on a quarter-on-quarter basis. So what led to this increase? And is this sustainable, the increase in your margins? My second question is on the general administration. Again, you mentioned that you are controlling costs, et cetera, but it seems like you have -- it's declined quite significantly. Is it because there was a higher cost base last year? Or what is leading to this decrease in G&A for the quarter?

Thank you for your question. I think you touched a very important question, how we can be a more sustainable our margin? Yes, I think what this year compared to past 2 years, I think this is, I would say, the recovery year in our -- especially on the bottom line and the top-line, as I mentioned, because of the market -- sentiments were positive, and we got market share more on that. In terms of gross profit, the key contributors are especially volume growth. I think this is significantly increasing because of market share gains and Baladna in all categories, we are overdelivering, thus impacting our margin. And the second impact was major the commodity pricing, yes, because in the last 2 years, it went all time high. Now we are seeing the momentum is getting back. And many things is coming to the prior COVID stage. And third thing, you are seeing this selling prices when we did last year in quarter 3, that's -- compared to year-on-year have also a significant impact on our margins. And overall, what I mentioned in our overheads getting better, one of the elements you have noticed, there's a G&A. The G&A is getting -- and this is one of items we have seen but in our -- across in the operation overheads also getting positive momentum because volumes are increasing, and we are putting our stringent cost control measures there, and this is going down. So in G&A, primarily this is going down because of staff cost and commission. Communication cost is going down. These are the 2 elements, I think, and we can -- and the professional fees what we paid last year, it was high. And this year, we have these 3 significant impacts. And if you need more details, maybe my team can share with you the -- in the detailed comparison with the last year.

Just a follow-up on that. You said the staff cost is being reduced. Is my understanding that's what you meant, yes?

Yes, staff cost, yes, because our employee cost -- I said because overall overhead, the employee cost is a significant element in overheads, in the operations side and the G&A side.

So is it being reduced because you have let go of the staff or you have outsourced some functions?

No, if you outsource it will come into the G&A again. It's an overall reduction and the sales increasing, so structure we have a change. What we did now when the new CEO came, he did a new restructuring overall in the Baladna. Now we are seeing the results now, yes.

Our next question comes from Sultan Al-Shaalan from Jadwa Investments.

Just few questions from my end. Just a follow-up on what you mentioned, the reasons for the improvement in gross margins. You mentioned higher selling prices. Just wondering, of the 15% of the first half achieved, can you give us a breakdown of the volume growth versus prices? And if you can give us more clarification on how do you see the gross margins going forward, probably the second half or the next few years? Should we expect further improvement in margins going forward, especially with commodity prices still going down and volume growing? And if you can give us also more details on the Algeria plan, what kind of CapEx should we expect? And what type of IRR expected from that project?

Your first question, the impact on our margins or our GP, the impact of price increase is between 40% to 45%. The rest is coming from our volume increase plus the costing and the overheads. So, there's a significant impact from the operations side, not from the price side. On the Algeria project, as so far we published in public domain, the number, the project size is huge. And this will be one of the largest integrated dairy project in the world, USD 3.5 billion of investment. And at this stage, we are finalizing with third-party feasibility and agreements are going on with our counterparty where we are finalizing shareholder agreements and other definite and [ OpEx ] agreement for this project related. And we are expecting very soon these agreements should be finalized, and we are hitting ground in couple or maybe in a few months' time, we will start the project. Projects definitely -- when Baladna decided to go with these projects, there was a significant return on investments and for Baladna point of view, what we have considered this project. And very soon Inshallah once this -- all things will be done, we will publish our numbers to the market, yes.

Can you give us a breakdown of the sales growth? So first half 15%, how much of that was driven by volumes versus prices?

So, sale growth what you mentioned this – this sale growth is coming -- 45% what I mentioned to you, is from sale price, the rest is on volumes.

And with regards to the margin sustainability, do you expect these margins going forward to be as the second quarter of the first half? Or should we expect further improvement in margins going forward?

We are expecting further improvement. If you compare our quarter-on-quarter performance, first quarter, we have a very significant growth in top-line and bottom line, and we maintain our net profit margin at 17%. If you look at the quarter 2, we have a slightly -- sale is because of seasonality, is down compared to quarter 1, but profit went by 19%. So this reflecting our continuous improvement on the operations side and the margin. So, inshallah we are planning to maintain this over the coming quarters.

Can you give us an update on the support received from the government? And how is this going to change from one year to another?

Yes. This compensation is agreed for 10 years. And every year, on time, we are getting, and there is no issue for this compensation. In 2023, we received QAR 110 million and 2024, we are expecting QAR 105 million. So, this numbers and the agreement as far as this compensation is coming. And this is almost reaching to prior 6 -- I think 6 installment we received, only remaining 4 installment.

Was this renewed or expected to end 2027 [ from now ].

2027 it will be end, but there will be another discussion we will start in 2025. And because business itself getting sustainability, and we are expecting that business now generating profits and then there will be definitely discussion with the government to maintain the reasonable return for the shareholders. So, there will be discussion on this. But more important is how to be -- shareholders will be getting a reasonable return on their investment.

Our next question comes from [ Bilal Saba ] from Jadwa Investments.

I just want to clarify a statement you made. You mentioned something about prices in the third quarter of last year. Could you elaborate on that? Were selling prices increased in the third quarter of last year?

Yes. If you see last 2022 and 2023 were -- all commodity prices were all-time high, and there was very significant impact of inflation on our cost line and the profitability of the company went terribly down. And that was a case where we built our -- to transfer our cost impact to the consumer, and we got approval from the government, and they allow us to shift partially that cost impact to the consumer. And this is what we got approval, and we increased on a different category, different prices in last year July 2023.

And what was the range of the increase, like 5% to 10%, 10% to 15%?

It's different. We didn't apply across 100% SKUs, but it went from a different category from price to long life, it was -- these were different percentages. I don't have an exact number in front of me. And if I will give you roughly between 10% to 12%.

So as we are today in terms of your manufacturing capability, at what operating rate or utilization rate are you operating at now?

Okay, this is today what Baladna, you know this, we are a strategic food partner with the government, and we are providing all food security, food self-sufficiency. So, we maintain our reasonable capacity for things went up or something go wrong, so have a backup capacity. So our total capacity utilization today is between 50% to 60%.

You started manufacturing for third parties. I think [ indiscernible]. You also added capacity in creams. So I'm just trying to get a sense on how much they're contributing in terms of the third-party sales as well as the new lines and creams that you added?