Engro Fertilizers Limited (EFERT) Earnings Call Transcript & Summary

[Foreign Language] everyone, and thank you for joining the corporate briefing session for this first half for Engro Fertilizers. So as part of process, so we have a couple of slides. I'll present those, some discussion on the economy, on the market and update on the numbers. Then once the presentation is complete, we will open the floor for questions. As per past practice, you also ask the questions on the chat and my team will make sure that they respond to your questions also over chat. So you've got both options. You can either ask your questions through chat or also ask online after the session -- the presentation is over. But one request whenever you pose a question or online or whatever, please do introduce yourself first so that we can, we know who you're referring to. So starting on with our presentation. So important disclaimer. I think we all understand this. I can move forward. So the agenda is, again, 3 areas where we talk about business highlights. We talk about business performance and then the contributions and challenges as we see for us and the industry. I think a brief snapshot of the macro-economic overview, and I'm sure we all are aware of this, but I think just to sort of bring perspective in terms of the fertilizer industry. So if you look at the global landscape, so I think the past first half has been a roller coaster in terms of challenges globally, primarily because of the war, which was -- which we saw and the ups and downs because of the war. The challenges continue as we speak because the matter was escalated, again, de-escalated, I think, yesterday and then. So it is again, there is yo-yo in that. But because of all those geopolitical challenges and Strait being shut down for a specific period of time or rather being shut down intermittently, so we have disruptions in terms of route crude. I think, peaked over $100 a barrel. And consequently, in Pakistan, we saw the increase in petrol and diesel prices, sharp increases also and then sort of rationalizing over a period of time. Urea prices globally peaked to around $900, DAP over 9x $35, $950. Positively, I think the plus point has been that urea in Pakistan is not imported. So I think as an industry, we are -- Pakistan insulated with the high urea prices globally, then that did not impact us. But yes, the DAP high prices did have an impact because as you would understand, Pakistan, the total demand is set around 50% by -- I'm sorry about it. I think there was some challenge with the presentation being displayed. So apologies for that. So this is going back, I think I was talking about the urea. So urea and Pakistan does not get imported. I think so that's been the positive. As I think the landed cost would have been around PKR 17,000 to PKR 18,000 urea import Pakistan at that point in time. So I think as a destination, we were quite fortunate to have local production in place. DAP on the other hand, around 50% is produced locally and the rest is imported. So yes, the DAP has seen shocks in terms of prices and also the raw material for DAP also has shot up globally, which also has shown a rise in DAP prices globally also in Pakistan. And similarly, sulfur also hit a record high. So commodity prices displayed sort of peaks and then sort of came down. DAP, as we speak, is still in that particular levels. And globally, there were some loss of access because of the war and there were certain shortages also, which again led to the price increase. But if you look at Pakistan on the other side, so I think inflation has been higher in June, the policy rate, I think after 3 years, we saw a hike in the policy by 100 bps. I think exchange rate has remained stable. That has not moved adversely. And the stock market has also shown, it has witnessed its share up and down, but it's currently at say, second quarter, it was 10,000 points. So I think the real message here, I think if you see in the last line is domestic urea production was the critical buffer and insulating the farmers from all those price shocks. So a little on the farmer economics. So farmer economics, you understand wheat is a big contributor. So wheat has shown great progress and people have seen price around PKR 500 also support price, open market prices as we speak, have crossed over PKR 4,000. So the returns in terms of farmers from the wheat remains positive. But having said that, DAP on the other side, because it has crossed -- on a landed basis, it has crossed over PKR 16,000, [ PKR 70,000 ], the DAP uptake from the farmer is low, even though the farmer economics are quite better. Plus on the other side, rice, I think rice has also shown improved prices, so which should also help the farmer liquidity. So on the farmer economic side and the commodity side, I think we be safe to say that there has been good positivity for the farmers. There has been stable water supply, no major climatic disruptions have been. But again, having said that, we do fear -- there's always a fear of severe weather conditions. We've seen certain happening in the recent past also. But again, having said that, the water availability remains stable. And farmer input costs have increased primarily because of the fuel escalations and because of the -- primarily because of the war sentiment. So all in all, I think from the farmer economic side, from a sale price of commodities, I think they have done well. But yes, the input costs have continued to be -- continue to pressure because of the global economic scenario. Moving quickly towards the urea business. So if you look at the numbers, YTD likely sales of the industry around 2.5 million tonnes as against 2.35 million last half year. So the sales have been close to what we sold as an industry last year. But the market share of Engro is quite lower than last year. It is now at 21% as compared to 29% last year. And if you look at the quarter, the similar picture, and we have a quite declined market share from 34% to 17% and again, if you look at the chart on the right, the total inventory, around 74% of the inventory is with Engro fertilizers. So dealt with the many questions around this people ask this. But again, this is part of our planned strategy. You would appreciate the fact that Engro Fertilizers does have a high gas cost base. And based because of that, our price -- our base price of our urea bag is higher in the market. And when the market is balanced. We definitely will be -- the urea bag of ours gets picked up later in the order because the cheaper ones get picked up earlier. So we understand that, that will happen, and that has been what we've seen also. But considering the fact that Pakistan has an annual demand of around 6.5 million to 6.6 million tonnes every year, it's a timing difference what we see. And our urea bag will be sold towards the end of the year because second half, the industry does pick up. So as we received many questions from many of our research friends on the research side, and this has been our clear answer because we are very clear that this is how we operate because -- and there is no willingness from our side as we speak to offload our inventory by giving discounts. So if we have a higher inventory position, we're completely comfortable. We have all the arrangements available. And so -- because as I mentioned, there's an annual market which we're looking into. Moving on the DAP side. So DAP, as I mentioned, DAP has become a product which is now very expensive. And you can see by the sales pattern, especially if you look at Q2 sales, the total industry has sold around 200,000 tonnes around as against 10,000 tonnes last year. So our market share has again dipped from 19% to 13%. But I think the major dip is primarily in the DAP sector of the industry because of the higher market price and the sharp price increase in DAP globally. So this is one area which I think has shown a decline, quite decline on an industry basis, where urea, which you saw in the last slide has not seen any dip, but DAP, yes, has seen a dip. But if you look on the half yearly basis, we still are too close to what we sold last year. But the higher prices do depict a lower sales volume. The prices remain at that level, the volume may be under pressure in the second half of the year also. So a brief snapshot of the financial numbers. So we see quite a bit of red here. So because we -- there is lower sales as compared to last year. So the revenue and profitability has shown a decline as compared to last year. On a half yearly basis and also on a quarterly basis. But having said that, the organization has continued to declare dividends. We declared dividend in the first quarter, and we also have declared a 1.75 dividend in the second quarter. So the idea and we've mentioned that -- as I mentioned, because the accumulation of urea is part of our strategy, and we understand how the sales pattern should work. So our dividend distribution has not taken any -- there are no changes in dividend policy, as I mentioned, and we continue to give out dividends. So that's an important message here also for all of you. I think I've covered this, but I think the main -- the main sort of messages here is the gross profit margin, which has been maintained even though we've got lower sales, but the GP margin is maintained. And one other important thing is we -- in terms of profitability, there is a one-off gain in terms of SIDC. I'm sure you all are aware of the Sindh Infrastructure Development Cess. There was quite a bit of provisioning in the industry. And then there was an industry-wide settlement which took place. And because of that, there is an accounting remeasurement gain, which has come in of around PKR 1.5 billion in our financials in June. So that also has translated and assisted us in the profit - in the profit you see for the second quarter. Similarly, on the debt to capital, we do have high inventory levels. So the financing requirements are higher and the debt to capital is on the higher side as we speak. But definitely, it is expected to rationalize towards the end of the year by the time the urea bags gets sold. A brief update on our Engro Markaz. Markaz is our brick-and-mortar setups. So from -- we've read out now 10 stores as we speak. And if you see the farmers onboarded, you see there's a healthy increase every quarter-on-quarter basis. And [Foreign Language] two more shops should be coming live by the next quarter as well. So we've got good feedback and good response from our customers. We've -- all our Markaz outlets are run by females. So that's one thing which we are very proud about. And [Foreign Language] , these are giving good results to the organization, and that's why we will continue to invest in this area. So we've continued to contribute to the next in terms of taxes and duties to around PKR 9 billion. And again, as I mentioned in the previous slides, urea landed cost on an average for last quarter was around PKR 13,000. So Pakistan operated at a discount of 63%, give or take. Current price is lower, and it's not as high as it was in the last -- in the second quarter of 2026. So last slide, pressure Enhancement facility, you all recall the fact this is an investment being done by the industry on the Mari network to make sure we have consistent gas supply for the next couple of years. So Phase 1, Scope 1 complete, Scope 2 expected to be complete within this quarter, which is Q3. Phase 2, which was about installation of the compressors, the installation and activities are in progress. And now we expect them to be complete and fully operational by Q1 of next year. So where the pressures have been maintained. There is no challenge on the gas side. We are receiving consistent supply of gas for the right pressure. But the facility -- the operational facility will come online [Foreign Language], fully online by Q1 2027. So that's it from my side. I'll stop sharing, and then I'll open up the floor for questions. If you could please raise your hand, so I can refer to you.

Muhmmad [indiscernible]

First off, I'd like to thank you for a great presentation and wishing you the very best of luck in the future quarters. So I just had 2 questions. The first one is regarding your dividend payout. In the last few quarters, including the most recent quarter, your payout policy -- or the payout ratio has ranged between 60% to 65%. And prior to those quarters, efforts has been known to be getting out 100% of its earnings. So is this a new norm that we could expect for the company in the future quarters? Or if you can shed some light on that, and then I can move on to the next question.

Yes. Please ask the questions first. I can respond both together.

Sure. Perfect. And then the other one, I just wanted clarity again on the market share and how that drops almost by half for this quarter. I believe you mentioned something along the lines of -- because efforts input costs are pretty much higher than the one of the highest. That's because of the billing that you get from [ Mari ] networks. So -- but I didn't properly get the other part. I just wanted clarity on what you were saying earlier. That's all.

So thank you for the question. So I think I'll take the first question, which was dividend payout. As I mentioned, there's no change in dividend policy as an organization. We still intend to distribute dividends as much as possible, subject to approval of the Board definitely. And even in this quarter, if you see, we did distribute a dividend of PKR 1.75 from around PKR 3. And so it is a 60%, 60-odd percent distribution as we speak. But there's also a different lens of looking at it because, as I mentioned, there's also an SIDC accounting remeasurement, which is around PKR 1 in terms of our profitability. So from where we see it, it's a PKR 1.75 distribution from PKR 2, which is around 80-odd percent. So that's one we're looking at it. But again, you're right, if you look at it, yes, it is PKR 1.75 out of PKR 3. So there's no change in dividend policy. We intend to give dividends out. But having said that, there is -- we are cautious on the changing dynamics. Let's not forget the fact there is -- the war has its own consequences, which we see happening. Prices can go up and have different impacts also. So the organization has just been a little cautious in terms of doing distributions. But that does not mean that we have a changing policy and that's not a new norm. I think that's the first answer. The other thing is, as I said, the market share has dipped, you're right, because as I mentioned, when you have a urea bag, which is the most expensive and you've got an ample availability of urea. So definitely, in the bags which are cheaper in price, will get picked up first as compared to the one which are price event. But eventually, these will get picked up. So in Pakistan, you understand the total production in Pakistan is around 6.5 million, 6.6 million tonne, give or take, on a yearly basis, right? And the demand for Pakistan is around the same number, 6.6, 6.7, 6.5. We can debate on. That's the range we've seen over the past many years. So it's a matter of time. The entire production has to get sold. So yes, you may look -- you may see a lower market share in second quarter and even in the first half. But as per our anticipated expectations and numbers, we should be back to our market share towards the end of the year because that's when our product will also get sold, right? So that's the simple math we're looking into. Muhammad [indiscernible] Do you have a question?

Perfect. Sorry, I just have one more question. So in regards to your procurement of DAP, of course, all that's happening in the Middle East. So is that largely -- so where exactly are you now procuring DAP from? Or has the strategy been changed in order to save freight costs in any shape or way to gear up for the upcoming Rabi season. So if you could just shed some light on that as per what the company's strategy is to maintain margins and...

There's no change in strategy. I think it's just, again, it's just being a cautious approach because once you have DAP sort of cargoes available to north of $900 and Pakistan generally has not seen prices over PKR 15, PKR 6,000 on a historic basis. So you will have cautious buys. And to add up to the challenge, there's also challenges of the Strait of Hormuz and others being closed also. So the idea is to procure DAP and remain consistent in the market. So that's why you see we are holding an inventory also as we speak. It is a price inventory we understand. And the sale pattern is slow, not only for us, for the entire industry. But again, there is no change in strategy. We will continue to be suppliers of DAP. And we're making sure and definitely, we look around and we try to seek the best deals available. We do get it right. We get it wrong also at times, but we try and see the best deals and make sure that we are in the market.

Usama, your line is up.

[Foreign Language] I think even two quarter back [Foreign Language] And again I assume, with this the growth is 1.5 million inventory but that's not [Foreign Language].

[Foreign Language] as industrial we are giving discounts and the sales pattern, you could see. You just saw on the previous slide, [Foreign Language] industry half year sale is higher than last year, right? And the industry technically has been operating without discounts this year. So [Foreign Language] everyone was doing discounts by us and other players also. This year, the major players are not into discounts, right? Even then you see higher sales. [Foreign Language] This is how things get normalized and rationalized. It's a game of patience also, right? And that's why when I mentioned the fact we understand we are holding [Foreign Language] but we understand the fact that this is how it will play out, and it's a game of patience. And that's why, as I mentioned also in the presentation, there is no intent to give discounts out. And because we are very confident on the overall market of urea, and it does sort of come to a level of around 6.5 million, 6.6 million tonnes, which means that the entire production gets sold on a yearly basis. So it's a game of patience also. So to answer your question, the shift cycle is happening by [indiscernible]. I think as of now, there is no intention to give discounts and lack of a better word into that cycle again. [indiscernible]

[Foreign Language]

[Foreign Language] Cheapest gas is a phenomenon of the reservoir you can guess from. So FFC company [Foreign Language] And yes, there are efforts at our end also to see where we can rationalize and improve our gas costs. And there are definitely -- there are certain initiatives at our end with -- and trying to work with the ministry to get hold of those, right. That's from that side. On the other side, is Africa, there are FFC venturing into coal. I think it's a great initiative at their end. And I can only tell you there are also multiple initiatives in under discussion and under evaluation at Engro's end. And we will inform the market when the right time comes in short. We've got someone from Topline Securities.

[Foreign Language] [indiscernible] I'am Shankar Talreja from Topline Securities. Just wanted to get some clarity on the pressure enhancement facility. If I can recall, plateau maintain [Foreign Language]. So what is the quantum of the production loss that industry has seen during last six to seven months or as now, what is the situation [Foreign Language]

[Foreign Language] which is the $300 investment by the entire industry. So that was cleared -- so which will come live Phase 1, Phase 2. Phase 2 will come live [Foreign Language] by first quarter of 2027. So that's the project I was talking [Foreign Language] a separate topic [Foreign Language] because as of now, we're not part of that particular investment because that has been done by the other players as we speak, not us because they'll be using the leads in the addition part as per the overall scheme. So that's one answer. [Foreign Language] you're right, as per our understanding also, and I think this briefing, they've also mentioned the fact that Agritech is not still closed down [Foreign Language] FFBL has restarted its operation. As far as I understand, fast worker plant [Foreign Language] In terms of supply constraint [Foreign Language] because it just happened. And I think give or take, I think between 50,000 to 60,000, 70,000 tonnes impact [Foreign Language] and depending on how long these plants remain closed. [Foreign Language] I think that's the number we see because of the closure of the plants. Zainab Khan.

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