Engro Fertilizers Limited (EFERT) Earnings Call Transcript & Summary

Salam everyone, and thank you for joining the Second Corporate Briefing of Engro Fertilizers. This is regarding the second half of the year. And so as per our normal practice, we do have a brief presentation, which would cover certain highlights of the half year. And then we can open up for questions. We will be taking questions over the chat box also, which certain questions will be answered by my team and other questions I can take it by myself at the end of the presentation. So the presentation should not take more than 20 minutes, and then we should be opening our sort of panel for questions. So I'll just move on. So we've got basically the presentation is broken into three sections. We've got certain highlights, then we talk about the business performance and then we move on to the contribution and challenges. And then definitely as a process, we move on to the Q&A. So a brief highlight. We start from the macroeconomic overview. Sorry, not too well, so I'm sorry for that. So inflation, if we look at the inflation for the half year, so we've -- it's been quite on the lower side. So moving back in -- so in terms of the macroeconomic numbers, you see the inflation numbers are lower as compared to last year. So definitely, things are improving. The policy rate is also lower as compared to last sort of-- last quarter, I would say, because we did see a 1% decrease in the rates. Exchange rate is a little higher as compared to December. We are a little higher in the exchange rate, but still not too high as compared to the last December. And GDP is showing decent sort of number of 2.68%. I think one important thing to focus is the fact when a new sector contributes around 24% of the overall GDP that has only grew by 0.56%. And even from those, if you do a deep dive, the crop-related agriculture, which is around 30% of the overall agri sector GDP, that has declined by 6.2%. So where the other livestock sector has shown some increase, the crop sector has shown a decline in the overall GDP also. So where headline numbers in terms of inflation, in terms of policy, in terms of GDP, we do see some growth. But specifically when we do a deep dive on the agri sector itself, especially on the crop side, you see, is a decline around 7%. The main sort of reasons for decline, input costs have remained to be high. Those continue to high in terms of seeds, diesel, rentals and whatnot. We've definitely seen a big shift in the agri space when the government decided to let sort of do away with the support price mechanism, and we are now under free market. So this has also led to certain challenges in the sector. But definitely, those are sort of improving as we speak. It will take some time. Climate change, we all are -- it's a global phenomenon, not only for Pakistan, but you would recall in this particular half year, we have seen challenges in terms of lower snowfall and then we were seeing more rains, which have led to some flooding also, which has caused a lot of disaster, in certain areas. So it has been sort of erratic, the snowfall and the rainfall. And last but not the least, the annual production of cash crops as compared to last year has declined by 3.5%. And so the multiple contributions to it including weather, including farm economics. And as I'm sure a lot of you've seen a lot of numbers in papers and even the research of the economic cycle that wheat and cotton have shown quite declined as compared to last year. So the agri sector sort of remains under certain stress and the concern remains. Moving on to business performance. So we start with urea. So in terms of the industry numbers, last -- compared to the first half of last year, we were around 28%. This time, we are 29%. So we won't say it's improved as compared to last year because you would recall last year, first half of the year, we had a major turnaround, and that's why our market share was low. So technically speaking, our share is lower in this half year as compared to the last year. But when we look at the quarter-on-quarter numbers, first quarter, we had a market share of 24%. But second quarter, I think a great job done by our team, and we've increased our market share for the second quarter to 34% as compared to the market share of the first quarter. And [ disheartenedly ] we were holding a higher inventory share at 52% at the end of quarter 1. Now we have an inventory share of 43%. Even though the inventory numbers are higher as compared to first quarter, we were at 431,000 tonnes. Now we at 563,000 tonnes. But if you look at the industry numbers, it's grown from [ 849 to 1309 ]. So we do have a market share of 43% as [indiscernible]. So there is improvement. But having said that, the urea market remains under stress as we speak. We did talk about it's initiatives,at the previous annual briefing, like sort of -- we do have a brick-and-mortar setup called as Engro Markaz. We've got certain outlets operating in Punjab. We started in [indiscernible] very aggressive on this side. We started flows, assessing the results of it. And the other major investment and focus remains UgAi, which is a digital platform to give access to farmers and value added purposes. So as an organization, we understand the importance of these initiatives and the platforms, and we continue to double down on the efforts on these to provide more and more value-added services for our farmers and also enable their out switch. This is another sort of initiative we have done very recent I'm sure you've read it in multiple papers also and also in social media. So recently, we signed an agreement with Bank Alfalah which will help us to provide farmer financing to a large livelihood farmers, total amount PKR 250 million which is available through our Markaz and also our UgAi app. So we feel this will help us -- will help the farmers who are struggling in terms of their financial set of numbers. So this should provide them some respite specially those small farmers to help them with their produce and helping them with their crops. So we're quite proud of this initiative and we thank our partner also to help for this invention. Moving on from urea to DAP. So in DAP, the important thing to see is the side, if you see the sharp increase in prices of DAP internationally. So they used to be around $640 and now they are close to $780 and maybe giving, going and further proud as we see. So this has--and this super good [indiscernible]-- while the international prices continue to go up, the local prices have not sort of risen by such sharp increase. And therefore, the margins and have been very, very low on the DAP side. So that's why as a sort of strategy from our side, we have remained ourselves low on the DAP business. Still, we have increased the market share by from 16% to 19% on a quarter-on-quarter basis. But if you look at the half year sales, we are down in terms of market share from 23% to 18%. So as an organization, we continue to evaluate and monitor the situation. And based on that, we will take our decisions going forward in terms of DAP. We understand the criticality and importance but we also need to sort of keep a close eye on the prices and the market ability within Pakistan. So that sort of covers the business segment. And now coming briefly on the quarter numbers. So the revenue is up as compared to the last period -- same period quarterly--quarter period. So we have an increased revenue of PKR 250 million -- and profitability is up by PKR 5.6 billion and the EPS for the quarter is PKR 4.17. If you look at the numbers, you see the green arrows as compared to the last quarter of 2024. So it does show an increase. It does show better performance as compared to the last -- similar quarter of last year. But the reason is because that particular 2024 was a year when we had our turnaround and we also had the cost of imported urea in our books. So to those numbers were the primary reason that you see the green arrows. If you sort of take them out or sort of normalize those, those numbers definitely are not as good as last year so... And that sort of reflects in the revenue to date. So we are lower than last year on a total basis as compared to last year. We do--we had a [indiscernible] of PKR 4.17, we have declared a dividend of PKR 4.25 in this particular quarter and it's about our yield dividend is down, PKR 6.5 so [indiscernible] we have distributed, are probably, PKR 6.34 and distributed PKR 6.5. So we have distributed whatever we have told this year also as part of our past package. So very briefly, I did touch upon this, but I'll just sort of go one by one. So revenue has reduced by 9% primarily because the graph I showed you in the previous slides, have reduced [indiscernible] volumes. Gross profit is up by 5%, but again, same reasons, we did not have our turnaround and imported real cost as we had in the same period last year. So all of that primarily translates into the net profit, so next slide you see a higher healthy net profit, but this is also measures that ours, at internal measures to-- for effective cost management and we try and [indiscernible] we can show that we can [indiscernible]. So those also have an impact where you see an improved bottom line. If you look at the ratio, again it shows differently higher as compared to December, so we were at 2% down by 57% in turn around, if you do the calculation, this is primarily because of the higher [indiscernible] levels. So we were at close to 100,000 tonnes of inventory at December and now we are close to 50,000 tonnes of inventory. The consumption is primarily the reason, you see high grave issue. All of you look at the financials, you will see a PKR 30 odd billion would be turning finance and that is the primary reason you see for the [indiscernible] issued. Having said that the depth EBITDA levels are still very healthy because we are a company who has been distributing 80% dividends. So we understand our equity will always be at a lower number. So where the [ gear ] ratio looks at a higher number, but the EBITDA if you does right story, and we are very sort of pleased and this going to [indiscernible] in the long. A brief snapshot of the contribution. So we have contributed around PKR 14.5 billion [indiscernible] in terms of duties and taxes, in a way it applied contribution. I will provide our sort of humble share to the [indiscernible]. On the other side, as an industry, we'll be helping our farmers through lower urea prices locally manufactured. And so to the tune of around PKR 3,600 or PKR 4,000, give or take. So the farmer continues to benefit in terms of the international prices of urea. Last slide, very quickly, we have always been giving updates on the pressure facility, which the industry is working on with BALI Petroleum. So that means our project is on track and Phase 1 is near to completion. Phase 2 is also on track with the order of the compressors and that should tells, Inshallah, as per plan we should be able to close this entire super project by next year, to LATAM, but having said that, the gas availability has already been secured and there's no depletion. So we are getting gas as required for all the plants.

So that covers the presentation. So now I'll just stop sharing and I'll just open the forum for questions. So if you can please raise your hand so we can let people in.

Okay. Sir, I had a question regarding the EBITDA margins. So your recent quarter had an EBITDA margin of around 23.5%, which was similar to your December quarter margin last year. So I had a question that despite high discounts provided by the company on your retail prices, the margins on EBITDA level have almost remained the same or improved as well in the March quarter. So could you give us any reason for why the EBITDA margin has been so sustainable? And what is the outlook on the margins?

Because December also was the month where we were giving heavy discounts. It's not the fact that we were not given discount. But in terms of EBITDA margins, I would say that whatever margins you see in the second quarter or half year, I would say, we did also going forward because these are -- these have taken into account our discounts, which we currently are sort of giving in the market. And we don't see any further price increase in terms of gas also. You would recall there was an SNG bill price increase, which was supposed to happen in July. It has not happened. So that's why we don't see any further increase in gas from here. So the margins you see should be good going forward also.

Okay. And secondly, has the company achieved any kind of operational efficiency in terms of production of fertilizer? For example, any improvement in gas requirement by the plants?

Well, we continue to work on that. And so just recently, our plant was successful in achieving, I think, the fastest million tonnes in terms of production in lesser number of days as compared to last year. Last time, I think we were lower by 10 days. I don't know exactly the number of days. So the efficiency part continues because we understand the fact that the gas prices are where they are, right? So the only way for us is to make sure that our plant remains efficient. Our manufacturing and plant teams are constantly working on multiple efficiency projects and we try and get whatever we can in terms of reduced gas usage or incremental production as the case. So that continues.

Okay, sir. Sir, my second question is about the export potential. There was news that the CEO of Engro Fertilizer had a meeting with the ministry regarding the export potential. So could you give us any update on that front?

Sure. So export is something we did meet the ministry. It was quite a few months back. Definitely, there has been discussion going on, on this particular chapter. But there's also an FRC, which happens regularly, which includes representation from the industry and also from the government. And those regularly sort of review the numbers on a regular basis because the ministry has a better sort of visibility of the demand and supply of urea. So they can -- so the numbers have been monitored. And based on that discussion, we will sort of work towards the right time to see when it's going to export.

Okay. Sir, my last question is regarding the pricing. So in case there is -- there are exports happening in the next year, what would be the pricing mechanism that you would be following for the export prices? Would they be at a discount to the international prices or would they be at parity?

Yes, it's difficult to say. The reason being you understand the fact that fertilizer industry is not a normal exporter. The last we exported, I think, was what, 8, 9 years ago. So we're not regular in terms of the export market. And it all depends also on the fact that where -- when at what time the industry goes out to export, what are the market scenario over there and what's the window to export. There are multiple factors to it. But definitely, the idea would be to maximize whatever we can in the available option we have. So -- but again, as I mentioned, as an industry, we're not too frequent, I would say, in terms of exports. So definitely, when the time comes, we'll see how to maximize it.

So my question is with regard to the overall inventory level, that you are expecting by end of this December 2025, [Foreign Language] there was a discussion, at this year we will close at around 500,000 inventory level [Foreign Language] if you didn't provide the more realistic picture [Foreign Language] was there any increase in discounts, during the last quarter? [Foreign Language].

So first of all inventory levels [Foreign Language] stick around 1.3 million roughly at give or take template. So yes, you are right, FRC did have a degressive number, which is a reward number, the number forecasted in the last time call also.

But again sir, how we see it and [Foreign Language] we feel that the invested levels will be over a million tonnes [Foreign Language] if you can say.