Makhazen (MKHZN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Agility's Q3 2020 Earnings Webcast. My name is Abby, and I will be coordinating your call today. [Operator Instructions] I will now hand over to our host, Rita Guindy from Arqaam Capital. Rita, please go ahead.

Good morning, and good afternoon, ladies and gentlemen, and thank you for joining us today. This is Rita Guindy and on behalf of Arqaam Capital, I'm delighted to welcome you to Agility's Q3 2020 Earnings Webcast. I have with me here today, Mr. Ehab Aziz, group Chief Financial Officer and Agility's Investor Relations team. Without further delay, I will now turn over the call to Soriana Borjas, Agility's Investor Relations Senior Manager.

Thank you, Rita. Good afternoon, and welcome to Agility's Third Quarter 2020 Earnings Webcast. As usual, we will start this call with Mr. Ehab Aziz, presenting Agility's performance during this quarter, after which, we will open the floor for your questions. You can type your question anytime during this call in the chat box, and we will access this during the Q&A. Before I hand over the mic to Ehab, I would like to draw your attention to the disclaimer available on Slide #2, as this presentation may contain forward-looking statements, such statements are subject to risks and uncertainties. Please take a moment to read them, and I'll hand over to Ehab.

Thank you, Soriana. Good day, everyone. Thank you for joining our earnings call today for the 9 months of 2020. The first 9 months of this year have been extremely difficult, and every company around the world has been trying to navigate through the different challenges that COVID presented to all of us. And Agility is no exception to that. However, that said, it is worth noting that we are seeing some positive signs of stability in Q3 relative to Q2, which is reflected also in the numbers of Q3, as we will discuss through the presentation. So the theme for this period, Q2 and Q3, at the group level that we have been faced with unusual event, which is COVID. And we have as a group, we acted, I would say, swiftly and decisively, taking some significant cost measures. We realized that we are also well positioned with the different portfolio companies that we have and that gave us some resilience relative to other companies and other sectors. And technology has been in our strategy as a key pillar. However, the COVID situation amplified the importance and the need to continuously invest in technology for the future. The theme for GIL for this period has been a strong air freight over the past, we have seen significant freight improvement during the quarter and during the period, the last 2 quarters as well, and that actually continues. And we see that also with our peers. Contract logistics has been performing relatively well and consistent with prior year. So no major impact. Project logistics has also been performing well within GIL. However, on the other side, this has been offset by -- partially offset by weaker ocean freight performance and a significant decline in Fairs & Events, which is the smaller part of the GIL products. Overall, GIL, I would say, has benefited from the situation due to the air freight performance due to the contract logistics, but also due to the significant cost measures and the realignment that the management has taken to realign the business -- the cost structure of the business to the current business levels. On the infrastructure side, as you know, it's multiple, mainly 5 engines. And of those 5 engines, ALP has been -- which is the largest, has been doing relatively well, has been year-over-year positive. And we are seeing strong demand on that business. However, on the other side, NAS and UPAC and GCS have been hit hard. Tristar on the revenue side has been hit however, on the profitability side, has been improving. So this is just the themes around the different parts of the business -- the portfolio that we have. Moving to the financial numbers. You can see that revenues for the quarter has been slightly up 0.6%. Net revenue has been down almost 10%, and that is in line with Q2. And as I said, that is -- as we would see also through the presentation, that is driven by the infrastructure side of things here and mainly from the non-ALP infrastructure entities. However, on the EBITDA side and the net profit side, we have seen some stability relative to Q2. Yet, still a decline compared to last year, but it's a relatively small decline relative to last year. So you can see around 2% decline for the quarter and about 30%, and that is much slower than the decline you have seen in Q2. Also, it's worth mentioning that in these numbers, in the profitability numbers, we have about KWD 3 million in Q3 of restructuring costs, net of government support and about KWD 6 million for the year-to-date. So these numbers should have been higher, had we not had this restructuring cost, by about KWD 3 million for the quarter and KWD 6 million for the year-to-date. Moving to Slide 7. You can see that the revenue decline is primarily driven by the infrastructure. And as you will see later, that is mainly driven by the non-ALP businesses. And on the EBITDA level, the entire reduction has been driven by the infrastructure group. GIL showed a significant improvement year-over-year. For -- that's for the 9 months, about 12%. When we go to the GIL section, you would see that Q3 has even higher growth rates in terms of EBITDA year-over-year. So we feel very positive about the GIL performance during this period. We feel also very positive about GIL going forward, and we believe we have the right mix of actions today to position the business, the GIL business for significant growth in the future. Moving to Slide 8. The key point that I want to focus on here is the net debt, which has increased from the KWD 148 million last year to KWD 174 million. However, as you know, that has been driven by the CapEx program that we have been going through over the past several years. And the following slide, would show that. That said, the net debt to EBITDA, excluding the IFRS impact, still at 1.4x, which is within an acceptable levels. You can see here on this slide the CapEx allocation, and it's, I would say, pretty consistent over the period. The main CapEx has been going to Tristar, which represents roughly 30 -- 1/3 of that is going to Tristar. And then the category, which is other, includes the Reem Mall financing and the Reem Mall funding, which is driving 42% of our capital allocation for the period. This is the historical chart. We can see over the years where things have been going. And as you can see, it's driven by Tristar and Reem Mall, followed by ALP and GIL. In terms of -- we had -- during the quarter, we had a very strong operating cash flow compared to last year. And that is also driven by the improvement in working capital. So cash position, I would say, despite the net debt position increasing, still at a relatively reasonable level of 1.4x net debt to EBITDA. Operating cash flow has been strong and continues to be strong, which is -- which gives us confidence. And then the allocation of that is going to Tristar, Reem Mall followed by ALP and GIL. Now moving to GIL. As you can see, I'll focus on the quarter-to-date first. And you can see across the different metrics, revenues, net revenues and EBITDA, there has been a significant improvement. So on a constant currency basis, 6.5% revenue improvement, net revenue 4.5%, but a significant 35% improvement year-over-year in terms of EBITDA. So -- and the same carries into the year-to-date. However, there has been an acceleration of performance in the third quarter. And that's why the growth rates have been higher in the third quarter compared to the year-to-date. That is driven, as I mentioned before, driven by airfreight. As we can see, net revenue grew by 24% for the 9 months and contract logistics about 9% and project logistics about 8%. The category, other, that you see there includes the Fairs & Events, which has seen, I mean, almost a complete halt of activities as a result of the COVID, but we are also optimistic that this -- once the COVID situation stabilizes, this will pick up again. Overall, the performance of GIL, as we can see, is moving positively, despite the challenges they face. Middle East, Asia, in terms of regional contribution has been positive, despite the COVID situation, and we are seeing some decline in Europe and the Americas. Infrastructure side, you can see that for the quarter, there has been a significant decline of 16% year-over-year and an EBITDA of 17%. The decline in EBITDA is slower than the 9 months of 25%. And that's why I was saying that between the cost actions and the improvement, the relative improvement in Q3 in some businesses is driving a slower decline rate in EBITDA. We are hoping, and we are seeing also some signs of stability, particularly in the businesses that have been hit hard, like GCS, the global business, the customs business and in NAS and UPAC. You can see that ALP has shown positive for the improvement in terms of revenue improvement in the quarter-to-date and the year-to-date. And that continues to be a positive sign. So also, it's worth mentioning that ALP is the largest contributor among this group of infrastructure businesses. So that is -- these are the key themes during the quarter. Again, just to sum it up, overall, it's a mixed bag, slightly positive in Q3. We are seeing signs of improvement and signs of stability in the different businesses that we have. GIL has performed extremely well and continues to perform extremely well in Q4, and we are hoping that this will continue into '21. ALP is very consistent and very stable from a growth perspective. The challenges that we are seeing are -- within the group is in UPAC, NAS, followed by GCS. However, we are seeing signs of stability in these businesses and signs of improvement also in NAS and UPAC and GCS. We are also -- we believe that we are well positioned from a portfolio perspective as well as from a company perspective to take advantage of the situation, and we believe the company will come out from this crisis, the COVID crisis, better and stronger. With that, I would hand it over back to the moderator, and we will be happy to take questions.

[Operator Instructions] Ehab, it looks like we have some questions that have come through. Would you like to read them?

Yes. Okay. So there is one question about the GIL cost containment measure and the run rate basically for these measures. Unfortunately, I mean, we are going through the budgeting exercise today for the 2021, and I don't have the figure yet for the complete run rate for GIL. However, I would say the figure should be significant, and we should be targeting a 5% to 6% EBITDA margin pre-IFRS. So that would translate into maybe KWD 200 million of EBITDA pre IFRS within the next couple of years. That's the goal, and that's the -- what we are after here. So I wouldn't give you specific cost run rate figure because I think that would be just one side of the equation. I would rather give you maybe our objective and our goal that we are working towards, which is to get about KWD 200 million of EBITDA pre-IFRS, which means we exclude the impact of the lease obligations on EBITDA. And that would be within reach in the next few years, that means like maybe 2, maybe 3 years, but that's what we are working on. And I believe the actions that have been taken and the mindset and the momentum we have gained over the past 9 months, particularly during the COVID situation, is -- will make us achieve that and it's within reach. So it's not something that -- it's actually something that I feel very positive about. There is also a question about the IPO, trend for IPO. I think the IPO is ongoing. As we mentioned before, we have moved the focus from a London listing to a regional listing in Dubai, and we are in the process of filing for the IPO. However, there is still some regulatory steps and a few matters that we are working on. But it's ongoing, that's the short answer. Another question, will Agility be booking losses of KWD 2 million relating to the legacy phase? I mean, I would rather not comment on any legal case that we have today. I think we try to be as extensive in our notes in the financials as possible, due to potential implication that this might have on the progress of the legal case. So I wouldn't comment on that. Everything is reflected in the financials, which should be available very shortly. So there is a question about Agility's role in distribution of COVID vaccine when it becomes available. I think the vaccine distribution will require every single logistics company to help and cooperate. And I think we are very well positioned to do that from 2 sides. One is on the logistics side, on the freight holding side. And as you know, we have global coverage of the freight cooperating network. So that definitely will be used to help distribute the vaccine, but also on the ALP and the logistics distribution parts, where we have the storage capacity, particularly in places in Africa and in the Middle East. So I think we are very well positioned to help distribute the COVID vaccine once and when it becomes available. Okay. So there is a question about where is the restructuring charges, which business? And what are the benefits? The restructuring charges have been predominantly in GIL. And the benefits you can see, already, that has been reflected in the quarterly performance, and we expect that to carry forward in the years to come. Okay. What is -- how much has the company -- the next -- the CapEx for the next 2 years? I think it would be more or less around the same run rate, particularly in 2021. I think 2022, by then the Reem Mall would have been finished. And I think the CapEx rate would be a little bit lower than that. But we don't expect to -- I think the CapEx rate is around 7% of revenue today, slightly higher than that. I don't think that will continue as a -- on an ongoing basis. But I would say, in the next couple of years, the run rate for CapEx would be around that level, which is about 7%. I think I have addressed most of the questions. I don't see any other questions on the list. So I guess that summarizes the call. There's one question that I just received about any update on Reem Mall? It's -- as you probably know, it's a very challenging retail environment. We try our best, and we are working very hard to navigate through that. Construction is ongoing. Financing, I would say, is in place to continue the project. So I mean from a delivery of product, I think that will take place, and we will deliver the mall next year. And in terms of leasing, the mall is still leased at about, 1/3 of the mall is still pre-leased. We are working on a few initiatives, but that -- these initiatives have been put on hold because of the COVID. But again, we started to see some traction coming back, and we are hoping that we can get this to the finish line. It's not going to be the easiest project and it's not going to be one of our highest victory project. However, we are doing our best to manage the situation as best as we can, and we are positioning the mall to be more of a logistics and e-commerce hub and technology hub, and we're introducing some new technology into the mall and working on a few initiatives there. But that said, it remains a very challenging project. There is clarifying questions about the cost. No, the cost saving is not KWD 200 million. I'm saying the EBITDA pre-IFRS would be around KWD 200 million. I remind you that GIL EBITDA pre-IFRS last year was around KWD 100 million, KWD 105 million. So effectively, we are looking to double that in the next few years. Okay. With that, I will conclude my presentation, I will hand it back to the moderator.

Ladies and gentlemen, this concludes today's call. Thank you for joining, and you may now disconnect your lines.