Makhazen (MKHZN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Agility Full Year 2020 Earnings Webcast. My name is Simona, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Rita Guindy of Arqaam Capital to begin. 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 would like to welcome you to Agility's Q4 2020 Results Conference Call and Webcast. With me here today are Mr. Ehab Aziz, Agility's 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.

Good afternoon, everyone. Thank you, Lisa, and welcome to Agility's Full Year 2020 Earnings Webcast. As usual, we have with us here is Ehab Aziz, our group CFO, who will go with you through the presentation to talk about Agility's performance during the year 2020 and Q4 2020. [Operator Instructions] Before I hand over the mic to Ehab, I would like to draw your attention to the disclaimer in this presentation. As this presentation may contain forward-looking statements, such statements are subject to risks and uncertainties. Please take a moment to read this, and then I'll hand it over to Ehab. Thank you.

Okay. Thank you, Soriana. Good afternoon, everyone. Good morning. I will just walk you through a very brief presentation that will summarize the performance for Q4 and full year of 2020. And then we'll go into Q&A at the end of this presentation. The first slide is a slide that we shared with you early on, I believe, in the Q1 analyst call, which summarize at the time, our view on the impact of the COVID, which has impacted everybody around the world. And that was basically our expectation of how the COVID would have an impact on the different businesses that we have. I think standing here today in more or less the same period of last year, I think pretty much the impact has materialized. The hardest state was our [ big ] investment in Reem Mall. I think that has been a little bit challenging in the environment. However, we are also optimistic about its future. But as the impact goes to the right, I think we have been -- Tristar has fared well, the real estate has fared well, shipper delivery, which is a small entity today, but I think with -- has great potential, given the e-commerce play, has fared extremely well. The one area that I would say we have seen better-than-expected is in the freight forwarding as we will see through the numbers. We expect it to be hard hit on GIL, but I think as the year ended, we realized that this has been actually better than expected in terms of performance and in terms of ability to weather this COVID storm. Moving to the financial highlights. I mean, last -- the Q4 had 2 adjustments that you would see in this slide, when we say adjusted numbers. These 2 adjustments are the Amghara, which we had an adverse legal outcome on the Amghara land. And as a result, we took impairment of about KWD 28 million. And then also in -- we had restructuring costs that we have taken, I would say, nonrecurring in nature. And that's mainly in GIL. That's about KWD 12.5 million. So excluding this, the impact of these 2 events would change our EBIT significantly for the group, but also for GIL, as we would see later on. Overall, revenues were up 2.7%, but that was mainly driven by higher rates in GIL from Air Freight. Net revenue is down for the quarter and for the year-end, about 7%, 7.1%. As I mentioned, EBIT, adjusting for that, EBIT would have seen for the last quarter, about 80% year-over-year. And for the whole year, we will be flat, almost flat despite the impact of COVID, if adjusting for these 2 events, the Amghara and the restructuring costs. As we have -- you probably have seen, our net profit is down 56% for the quarter and about 52% for the year. If we look closer at the impact where -- how the financial performance has been driven by business group. You realize that GIL, again, for the year has actually surprised us to the upside, has been up pre-adjustment, about 22%. And most of the decline is coming from the infrastructure side, as you can see. There's about 46 -- I'm looking at the EBIT side, on the right side, KWD 46 million is driven by the infrastructure. Part of that is also the Amghara. We did not adjust in this slide for Amghara. But -- and -- but however, GIL also, we did not adjust for the restructuring cost. So definitely this year, performance, the decline in profitability has been driven by the infrastructure group, part of which also is the impairment of Amghara land. In terms of balance sheet, we continue to enjoy a very strong balance sheet. Our shareholders' equity today stands at about KWD 1.1 billion, which also gives us comfort that any need to take any impairment accounting impairment because the economical side of things is already factored in, I think, in the way investors and banks are factoring things like [indiscernible], which we will talk about later. But the equity today stands at KWD 1.1 billion, which I would believe sufficient enough to absorb any shock, particularly if we have to any impairment or any provision for any of the issues that we have. Net debt at KWD 185 million, which is about 1.5x net debt to EBITDA, and that is excluding the IFRS 16 impact. So still a bit higher than last year. But that is also driven by the decline in EBITDA, which is we all know driven by COVID. But still, despite that, it's within reasonable range. We have focused pretty much this year on liquidity because of the COVID and the impact on credit standing of many of our customers and segments. And I think that has been reflected quite well in our operating cash flow. As you can see, the operating cash flow year-over-year has increased by about EUR 26 million. You see most of that improvement is coming from change in working capital, about KWD 50 million year-over-year improvement. And despite the decline in cash from operating activities before changes in working capital, that has declined by about KWD 26 million year-over-year. So we focused on working capital. We focused on collection. We focus on supporting our customers without jeopardizing our financial standing and our ability to continue to be resilient operator from a balance sheet standpoint. CapEx, and we also communicated that at the very beginning of the crisis that we were looking at how to maybe optimize some of the CapEx, but fundamentally we will not changing the path that we are on significantly. This year, our CapEx expense is about KWD 141 million. That includes some investments that we have made during the year, the participation in -- as we announced through the stock exchange, the participation in some of the ECG investments like Hyliion and Queen Gambit. So that's already included in the KWD 141 million. And you can see on the graph on the right side, you can see the evolution of CapEx spending over the years. And the summary of the last 5 years also in the total column. And that is [ 51% ] of what we spent for the past 5 years is in this other category, and a big chunk of that is in Reem Mall. Tristar comes second. It's a capital-intensive business because they have been investing in shipping. So most of that has gone in shipping. And then the rest is the AAP, which is the development of our industrial real estate portfolio in Middle East and Africa and as well as India. And GIL, which is mainly maintenance CapEx plus some investment in Contract Logistics, particularly in the Middle East. So I think we feel comfortable with the level of liquidity and the -- our ability to manage liquidity during a very tough environment. Also on the debt side, we have managed to extend our debt profile at the beginning of the crisis by 1 year. And then we have recently also signed another deal with group of banks from international and regional as well as Kuwaiti banks for 3 to 5 years' term. So we have -- I would say, we have managed well on the operational side as well as the capital structure and putting in place good medium-term financial -- financing facilities in place. Moving to the business segments. Again, the GIL, as you can see, revenues have been going up. But I think more importantly, because revenues can be driven by rates, which we don't really control. But what has been -- what is more important is net revenue, which has been growing quarter-over-quarter, as you can see on the top right graph. Last quarter, the Q4 is up 7% from the previous quarter. Some of this is seasonality. But also, when I look year-over-year, it has been growing significantly. Looking at EBIT as well. This has been -- EBIT and EBITDA have been growing. And I think the numbers here do not adjust for the one-off, which is the restructuring charges. I think it's in the slide that shows the annual, the year-to-date, so you can see that net revenue overall for the year is up about 3.8%. Adjusted EBITDA year-over-year is about 35% and adjusted EBIT for the year is up significantly, about 77%. So I think GIL has surprised us on the positive side this year. We see strong momentum into 2021. In, so far, January and March -- sorry, January and February. March numbers, we don't have yet. So far, these 2 months have seen significant double-digit growth in net revenue and a significant profitability improvement year-over-year because we tend to have very low profitability in the first quarter in GIL. But despite that, this year, the profitability for GIL in the first 2 months has actually performed extremely strong, which gives us confidence that this trend and what we are doing is going to last, at least, for the next couple of years, which is also very good news for all the stakeholders. Now what's driving that? There's 2 things, and maybe this slide can explain that a little bit. You can see that Air Freight is up year-over-year in terms of net revenue, about 31%, and we continue to see that in 2021. And Air Freight, if you look at the bottom-left numbers, Air Freight net revenue growth is 31%, and that is driven by yield as the volume is actually down 15.6%. So if I look at what's driving GIL performance so far, it has been needs in Air Freight, but also Contract Logistics. As you can see, year-over-year, Contract Logistics grew by 12% year-over-year. So that's one part of the story that's in terms of net revenue drivers. But also given the cost measures the GIL management has taken as a result of COVID during last year, that has significantly resized the organization in a way that I wouldn't say impair its ability to continue to grow and compete, but I think it was necessary in a situation like COVID. So that was a good opportunity to look at what is really essential to keep, what is not very essential, and what -- where can we save on our cost to drive performance. And so on one side, net revenue has been doing in air and Contract Logistics extremely well. And that actually drove the top line, but also the cost measures that the management has taken have also contributed to the success story, which, again, we saw that in 2020, and you can see the numbers in the previous slide, but I'm also seeing that in the first couple of months of 2021. So the same theme actually continues into 2021. The difference I see in the first couple of months, and time will tell if that is a trend or not, is that we started seeing volume -- 2 things, actually, we are seeing. Volume is growing in air and ocean, and yield in ocean is also up. So we are getting the benefit now of the Ocean Freight, which was a dragger last year, as you can see, 15% negative growth year-over-year, which is primarily driven by yield -- sorry, by volume, 12% down. In the first couple of months, we are seeing a reversal in that, and we are seeing Ocean Freight growing in terms of volume, little bit on yield. And we are seeing Air Freight growing in yield, but also volume in terms of tonnage started to grow year-over-year. So that gives us a great amount of confidence that 2021 is going to be also another year for GIL because also the cost discipline has been in place, and the management is pretty much focusing on growing our net revenue and competing and winning business wherever we are, but also making sure that our cost structure is under control and our cash is being preserved and managed appropriately as the cycle evolves. In terms of infrastructure group, you can see that in terms of top line revenue, all the entities except ALP has witnessed negative growth, which is also the main driver for the EBIT decline this year. If you look at the EBIT number in December, you can see that without, excluding the Amghara adjustment, there's about [ 50% ] year-over-year decline, just for Amghara, still there is a decline of 12%. And that decline is primarily driven by the 12% decline in revenues [indiscernible]. And you can [Audio Gap] 2 entities like Tristar managed to protect its profitability despite the decline in revenues. But in the case of UPAC, NAS and GCS, it was not the case. Looking forward, I see Tristar is definitely doing well. UPAC is stabilizing and things start to pick up. NAS rightsized the organization, took a lot of cost. And I would say, it's not bleeding money but -- and as airports start to open up again, we believe that business will come back to where it was in terms of profitability and where in terms of top line. GCS, can see that for the first 2 months of 2021, there has been an improvement and pickup in volume and revenues are getting closer to where it used to be before the crisis. So I think we will see a recovery in 2021 in these businesses, particularly Global, NAS [indiscernible]. And hope that NAS, together with the GIL story [indiscernible] reflect positively the overall performance over [indiscernible]. Now as we communicated to you, our goal from the beginning of this pandemic was to come out of this crisis even stronger than before the crisis. And I believe we have done [indiscernible] to make sure that this crisis is not [indiscernible] and we took advantage to a certain extent of the crisis and all the businesses have a [indiscernible] market position. So that and covering the other sectors, the overall pace of Agility for 2021 and beyond [indiscernible]. There are a couple of slides on sustainability. I will not go through them in detail, but I think we have been doing some excellent work on [indiscernible] work on sustainability and ESG. On the financial side, we have also made a few investments in ESG, and we're committed as an organization to continue to do that in the future. Now [indiscernible] a couple of slides that talk about the free cash flow and the dividends. This year, the Board has proposed about FIL 10 per share. It is higher than what we have paid in cash last year due to the COVID. It's not at the same level, which [indiscernible] pre-COVID, but I think we will gradually increase our dividends as and when the situation stabilizes, and we have more visibility on the situation in the markets [indiscernible]. My last slide is historical [indiscernible] for the shareholders [indiscernible] this year, we have also [indiscernible] exception. We saw about KWD 72 million of shareholder value decline in 2020 due to the COVID and the situation. However, as of today, almost all of that loss in -- not all, but because of the announcement that we also had about the legal situation. But I think the stock is recovering most of what it lost during last year. And I think, more and more, given the performance of the company and the future outlook, I think that should be positively reflected on the value for the shareholders. I mean, we don't influence or we don't pay too much attention to the stock price. I think the price will reflect the performance and the earning power and the cash flow generation of the company, which is what we focus on and I agree, this is reflected in this slide. There has been a significant success, rest of the markets will operate in relative to some of our peers over the years, and we have certainly created the value to our shareholders. I think that is my last slide. With that, we'll move to the Q&A. I'll try to address as many questions as I can, given the limitation of time and then see.

So -- okay. So there's one question about wanting to understand what's driving the adjusted EBIT in Q4? I think I have explained that. And I think it's [indiscernible] year-over-year. We [indiscernible] lot of investments and a lot of a [indiscernible] items that drive our performance. Most of our performance is driven by operating assets, and most of the EBIT is actually sustainable. What would be the potential loss in rental income, EBITDA from the Amghara land? Was the rental income getting accounted for this asset since the dispute started? Okay. So it's about -- the impact would be about KWD 6 million, KWD 6.5 million, if I'm not mistaken, as a result of removing Amghara. I want to remind you that also we have the SQ project, which we won, and we have started, which is about 1.2 million square meter. It's [indiscernible] that we are developing. So despite the challenges we have in real estate, the [ ESP ] in Kuwait, I think we have -- for the medium term, we have some mitigating measures that should compensate for any loss in the quarter. Okay. There is a question about adjusted net profit. We haven't done that, but I think you have the numbers. You can do some math on that, also our [indiscernible] can help with that offline. Okay. I think I have addressed the NAS and GCS during the presentation. So probably some of these questions before. Okay. Another -- it's more of a question about UPAC. And I think in -- its about discovery, can you discuss any [indiscernible] would lead to new normal for the business going forward? I mean UPAC has concessions and these concessions are clearly disclosed in the financials. And once the concession expired, the cash flow of these assets will stop. And that has been [indiscernible] so UPAC has been investing in [indiscernible] earnings going forward. Okay. So okay. The outlook on Tristar, the net profit margin is at 5-year low. And the outlook on Tristar is, I would say, Tristar is in the process of IPO-ing, as you probably have -- you know from previous announcement. And still the go decision is not yet final, but definitely the [ third party ] is preparing for the IPO. Tristar's performance has been -- I mean, if you look at it from a long-term perspective, I think this company has done extremely, extremely well and have created significant amount of wealth for all its stakeholders, us and Agility. We invested in Tristar in 2003. Today, Tristar, which was back then a very, very small company, but with very strong and good management, and today Tristar is a significant company by any financial metric. So the outlook of Tristar is, I would say, positive [indiscernible] it has the management [indiscernible] the business is doing well and [indiscernible] to grow and expand its market position. So I feel very positive about it. And I feel, given the history we have seen over the past [indiscernible] I feel very positive, but [indiscernible] long term, it's now a much bigger company. And it continues to grow at the same [indiscernible]. But hopefully, [indiscernible]. I'm not seeing -- okay, sorry, there is a small question. There is another question on UPAC new capital raise and the process and time line for the Reem Mall. [indiscernible] is that one of our biggest investments. As I mentioned before, Reem Mall is a [indiscernible] a convertible debt [indiscernible]. But in terms of construction, I think we have done a reasonably good job, the contractor has done a reasonably good job. Time will tell if they will finish [indiscernible] to be [indiscernible] in terms of Q2 this year or beginning of Q3. And so probably in June [indiscernible] today, I think that [indiscernible]

Ladies and gentlemen, we seem to have lost connection with Ehab. Thank you for your patience while we try to reconnect him. The call will resume shortly. [Technical Difficulty] Ladies and gentlemen, thank you for your patience. We have Ehab back on the line. Ehab, please go ahead.

Sorry, guys, for the technical glitch. So I was -- maybe I'll continue on the Reem Mall. Construction is about 85%, should be delivered June, July this year. And opening would probably be in Q1 2022. So I think on the leasing side, it's about 1/3 of the project is leased. I am optimistic and maybe after all, COVID is not necessity entirely bad for the retail, and I'm hoping that we have reached the bottom. I think all of us as consumers would like to go out and restart our normal lives again. So I'm hoping that, that coincide with the opening of the mall in Q1 of next year. And then hopefully, we have some positive momentum with such magnificent retail and family destination. Entertainment destination in Abu Dhabi on the Reem Mall. So it's not -- as I mentioned before, it's not going to be probably our best investment ever, but I don't necessarily feel it is a bad investment. And I think it is definitely very challenging, but I think it will eventually work out. So I think there is maybe one more question that just came. A list of questions. So I'm trying to read that, I think -- okay. These are like several questions. So let me try to address them as much as possible. Yes. I mean, one question is about GIL and our ability to pass on the elevated Air Freight. That is in the normal course of business. That's not the first time that this happened. And it's a normal thing in freight forwarding that we have tried the cycle. When the rates go up, there is probably a lag period between the time we can pass cost increase or cost reduction to customers, and that's in the normal course of business. All fright forwarders have the same. And I think we have a very experienced and long-standing operation and team who are managing this. So we don't -- this is not the main risk that we have. On the restructuring, the restructure will not repeat next year, that's for sure. And I think the profitability next year on GIL is, as we have seen in Q4, there is a significant year-over-year improvement, and we expect the improvement to continue for next year without definitely the restructuring charges. The first couple of months in 2021 have been extremely, extremely positive from a net revenue perspective and from the profitability perspective as well. Okay. So the fair value -- there is a question about the fair value loss of KWD 13.4 million. So that's a net that we had to take an impairment of KWD 28 million. But also because of the assets that we have in -- particularly in Saudi, which we also treat as an investment property. So as and when these properties are completed and delivered, we have, according to the accounting standard, to do a fair valuation for these assets. And as a result, we had a gain of -- during the year, due to the delivery of certain assets, particularly in Saudi Asia and Africa, and that offset the KWD 28 million. So mainly, the difference you see, the KWD 15.4 million is net of what we have gained on the other assets from -- in Saudi. And as we continue to deliver projects in Saudi and do fair valuation, this should continue to happen as well. It's not definitely something. It's an accounting treatment end of the day. The economical value of it is not necessarily reflected through the accounting standard. But it also gives you a view on the value of the total assets that we have on a fair value basis. Okay. So there's a question about ESG investments. As I said, 2 things I want to mention here. One, it is -- it's definitely not a huge amount of investment, given the size of the company. So if you look at it from a market cap perspective, we are about $4.5 billion today. Our investment, if I'm not mistaken, in total in that segment, including everything, not what we just announced this year, but including everything, it's probably around $100 million, $120 million maybe. So that is, I would say, about 3%, 4% of our market cap. So definitely, it's not a huge amount of investment or a huge amount of capital allocation we have made. Even if you look at it from a CapEx perspective, what we have spent throughout the year, it's still an insignificant amount. So just to put things in perspective, I'm not underestimating or trying to say that these are nothing, but there are definitely significant amounts in absolute, but also when you look at it from -- in the context of like the size of the company, I think it's -- now Hyliion, for example, we invested in Hyliion in 2016. It's not the follow-on investment was this year, but we invested initially in Hyliion in 2016. And that, I think, has appreciated significantly well during this year as a result of the listing of Hyliion. So it's not something new. We have seen an investment in ESG-related investments, like Hyliion, like now Queen Gambit. And I think if you look at it from the context of the overall value of the company and the overall CapEx spend of the company, they will not be material. At least, where we are today. And as far as I know, I don't think the company would all of a sudden change its core to become an investment company today. And this has been what we have been doing over the past probably 20 years and even more. So the investment is, I think, is essential from an ESG perspective. This is an opportunity that we have seen in 2016. I think this continues to be an interesting space to seed some investment and create some optionality going forward. Now we have become the core of the company, I don't think that would be the case, at least, in the short and medium term. In terms of profitability of Hyliion, yes, we have taken some to the P&L, but also the majority of investors [ fulfill ] as equity, any fair value gain would go to equity, a big chunk of the return for the gain is in the equity in our [ effective liquidity ]. And I think the financials is we should -- we can clearly see that there. Okay. Now on COVID and why we don't provide for the investment. I think for any rational investor, I think [indiscernible] I think from our perspective is enough from an investment standpoint because any actual investor would look at this and say that even if I have to take a complete write down of the investment and work it out from the equity, it doesn't have any economical value today. It's an accounting [indiscernible]. So whether we disclose it [indiscernible] in terms of our financial report or we take conversion for it, I think is irrelevant. As far as we are concerned, I believe, as far as the international investment is concerned because the amount is clearly disclosed, there is no further downside other than the [ write ] of the investment charges around KWD 345 million [indiscernible]. And as a result of that, we tend to [indiscernible] we should not take the write-off for it because it might have some [indiscernible] ramifications. So on one side, I think we have been [indiscernible] disclose that. We even have to carry qualification in our report, which amplifies the issue significantly to redo our financials. And anybody can make his or her assessment on whether they stick it all to take half of it, they should [indiscernible] not counting calculations on how much this should impact overall trend of the company. [indiscernible] perspective, we have been advised by our lawyers not to take any provisions. And currently, we have to live with this qualification for quite some time. So I hope that clarifies our position there. It is disclosed. Whether we take [indiscernible] equity and write KWD 145 million into the equity or not, I think it's irrelevant to the [indiscernible]. Maybe that is the last question [indiscernible] I think the time. But there is loans to [indiscernible] expanded to KWD 139 from KWD [indiscernible]. So the main driver of that is the Reem Mall because the way it's on Reem Mall today is through converted debt. And that, the investment there is classified as the [ consolidated ] pricing. So the expansion in loans is primarily driven -- of course, we have a big group, but most of this amount is the investment in the increase of that amount and the investment in Reem Mall that is classified as debt to [indiscernible]. I think -- I don't know if there are any other questions that I have missed, but I think I've covered most of these operational, financial and little bit of the outlook and how I feel about the future. And we're more than happy to address any other questions on [indiscernible]. Thank you very much. And we hope that 2021 is a good year quarter for Agility and its stakeholders.

Thank you all for being with us today in Agility's full year analyst webcast. A copy of the presentation and the transcript will be available on the company's website and also on GSM and BUSA Kuwait website. Stay safe and see you next quarter. Thank you.