Oman Flour Mills Company SAOG (OFMI) Earnings Call Transcript & Summary

Good afternoon, everyone and welcome to the investor discussion session for the audited financials of 2024. This is the first session in 2025. So welcome. I'll be discussing -- initially, we'll have an industry overview, then we'll look at the organizational snapshot, a little bit on the financial highlights and then the completed projects, achievements and future prospects. And then we'll move up to the Q&A sessions. So if we take a look at the current global market, we can see a lot of bearish and bullish news out there, a lot of situations that are causing some of the grain market -- some of the products or the grains to have a bearish momentum, some of them to have a bullish momentum. The geopolitical tensions between U.S.-China trade tensions and the U.S. tariffs, weather uncertainties, potential La Niña is impacting Brazil with Argentina and Southern U.S. regions with rains and flooding on one side and drought on the other side. China's reduced demand, cereal imports are expected to drop by 50% year-on-year. This is definitely a bearish news. On the market dynamics, U.S. corn market, U.S. acreage to expand global ending stocks to increase. We have seen corn prices slightly up. We'll discuss a little bit more on the next slide. The wheat market also is facing a little bit of a challenge, nothing major, more or less stable over the last year. And in terms of regional challenges, Ukraine, some labor shortages, weather conditions and of course, low beginning stocks. South America, La Niña, again, affects some Brazil rainfall dryness in Argentina. And in terms of trade flow shifts, U.S. tariffs redirect corn, soy and soy meal imports to South America. So it will have -- we're anticipating and looking forward to what will happen on that. If we move to the next slide and look at a closer look and this is like -- if you look at the beginning of the chart and if we look at wheat, you can see we are today more or less positions where we were just pre-COVID slight variance, but more or less within that same range. Within corn, corn is slightly up. I would say, on an average, it is about 7% to 8% above the lowest point last year. Soymeal prices have reduced considerably, very favorable over the last 1 year, continued to decline over the year, which compensated some of the escalation in price of corn. Barley is still not back to the pre-COVID levels and has seen a moderate increase over the last couple of months. Bran is also not yet on to the pre-COVID situation, but is slightly higher, a little bit higher in terms of the overall average of the year compared to the lowest price in 2024. If we go to the next slide, we are covered in terms of medium hard wheat for the next 2 months, in terms of hard wheat for the next 3 months, in terms of corn for 3 months. In terms of soybean meal, we are covered for 3 months and in terms of barley, we're covered for 2 months and bran for 2 months. This is, of course, for the stocks in hand. We have also additional coverage for orders that has been already confirmed and booked. And this is basically just to offset some of the grain prices fluctuations. I mean, there are many, as we mentioned in previous sessions, logistics, there's a lot of funds positions that do a lot of speculation, energy prices also have an impact, and weather patterns definitely have an impact on the prices as we move on. If we go to the next slide, we're just a reminder of our Group structure. So we have OFM sitting at the top with Atyab Investment as the investment arm of Oman Flour Mills. We have Arabian Food Industries, which is basically in the table egg business. We have Modern Dairy, which we acquired 1.5 years ago, which is a Al Khamayil brand, and they own 42%. Atyab IFFCO, which is basically constitutes of Sohar Poultry and Osool Poultry. This is in the fresh chicken category for Sohar and the hatching eggs for Osool Poultry. Bio products Oman, we have acquired 100% of this company. It used to be 33%. Recently, we have concluded the transaction for 100%. OMAUS is our company in Australia. Sohar Flour Mills is the flour mill operation in Sohar. Atyab International Services are the laboratories that we operate here in Oman and in Uzbekistan and Atyab Food Industries is basically the bakery that we have. In terms of financial highlights, we reported a revenue of OMR 109 million with a gross profit of OMR 18.6 million that is a 69% growth over 2023 and bottom line of OMR 7.56 million, which is a 324% increase over the previous year. In terms of understanding the gross profit, the 68.8% increase -- the 69% increase in gross profit is mainly attributed to our revenue increase of 7% and a COGS reduction of 1%. In terms of -- we can go to the next slide. So in terms of major changes, there is a 9% increase in staff cost. There is a 34% increase in depreciation. This is basically with the addition of the new feed mill that went into production last year. The material handling charges has gone up by 24%. That is mainly driven by a 12% increase in material handling. Our inventory increase advertisement and publicity is 39%. Of course, we're expanding our reach. We are doing -- we're selling our products in the UAE, and we're trying to push a little bit more into the retail market in the UAE. In terms of finance costs, there has been an increase OMR 2.7 million from the OMR 2.3 million due to higher average debt cost, but that was offset by an increase of 75.5% finance income, mainly from deposits and interest levied on related party loans. So the Group results, we've seen a good recovery in terms of the losses of the Group. So it went down from OMR 2.5 million to OMR 2.1 million. And this is an individual highlight of each company. Atyab Food Industries saw a 5.6% reduction in revenue and a 4.2% reduction in cost. They achieved OMR 168,000 net profit. The revenue decline is due to the QSR breakout and some of the UAE market challenges. In terms of Atyab International Services, we have seen a growth of 6.8% on the top line and a gross -- an increase in the gross profit. However, the company recorded a small loss of OMR 158,000. That's basically due to the operation in Uzbekistan. It started last year, and it's still in the starting phase. OMAUS in Australia recorded a minor -- a small profit of OMR 28,000. Sohar Flour Mills revenue has dropped 22%, which also resulted in a drop in the gross profit of 26%. The company recorded a 2.36% loss. Bio product Oman is still under construction. It is hopefully to start this year within the next 2 or 3 months. When we go to Sohar Poultry did very well this year, 17.4% increase in revenue and a 35.4% increase in gross profit, taking the net profit to just shy of OMR 1 million. Osool Poultry, as a company has done really well, and it has transformed its operation and became profitable. Our share of results is OMR 152,000. MPF has also recovered and has increased its revenue by 42%, which reflected positively on its gross profit, which increased by 49% and taken the net profit to OMR 194,000. EPF, Emirates Poultry Farm, despite having an increase in revenue, it is still facing a challenge in terms of profitability to show the loss of OMR 794 for the year. International Poultry Farms, this is the new farm in Ibri. It has -- the revenue has increased by 263%. It went into full operation last year, and the gross profit has increased by almost 700%. However, the loss was -- the company booked a loss of OMR 763,000, which was basically because of the start of the project and the initial stages. But the project is in full production as of today. Modern Dairy Farms revenue has increased by 91% year-on-year, which is a remarkable achievement and that has reflected on the gross profit, and that increased by OMR 230,000. The company recorded a profit of OMR 100,000 for the year. The completed projects, we have completed the Sohar Beach Bakery acquisition. The integration -- the acquisition cost was OMR 2.7 million. The integration progress is in progress and should be completed by end of April but the operation has been taken over by Atyab Food Investments. We have also completed the acquisition -- 100% acquisition at the cost of OMR 1.7 million of Bio products Oman. In terms of achievements, we have established the Atyab International Services office in [indiscernible] and the opening was in last March of 2024. So this is their new headquarters to facilitate their long-term growth. We have also managed to operate the Rusayl plant for Al Khamayil. So the production has started from Rusayl. In terms of future projects, project that we are looking at, we are currently evaluating a feed mill acquisition within this alternative Oman. We are also in advanced stages in terms of finalizing a proposal to separate the milling and silo division in Sohar Flour mills. We are evaluating a baby food market. We're evaluating a baby food production facility in Uzbekistan in partnership with one of the international funds within Uzbekistan. Millets has been the super foods in 2023, and it's taking a big pipe into the market because of its nutritious values. So we're currently exploring with the Ministry of Agriculture in terms of cultivation of millets within Oman and integrating them into our products. We are also moving to the second phase in our Australia company in terms of evaluating a shared farming proposal and how we can scale that operation. We have completed the feasibility of the bakery expansion in Saudi Arabia, and we're looking at the next steps in terms of how are we going to take this further. In terms of the industrial cluster development, the projects are aligned. We're just hoping to complete it with 1 or 2 more projects so that we can activate the industrial cluster. We're currently also negotiating and discussing food reserve management within the Sultanate of Oman. We have done -- we're currently doing trials on Chlorella. Chlorella is a high-protein algae and which is -- which we believe can have a positive impact on our feed production. We'll be introducing new products, hopefully, within this year in our flour segments, developing buckwheat flour and other offerings. We kept it as a surprise for our customers and our investors. So that's it for me today, and I will be happy to address any questions that you may have. So any questions?

Yes Joyce.

Congratulations on the good set of numbers, the improvement. My first question is on your feed mill acquisition. Now that you have completed your legal due diligence and everything, could you throw some light on the aspects -- different aspects of this feed mill, the target on what's the operational aspects and what are the financial aspects of this acquisition?

Well, this is basically more of an expansion of market share, more of a regional presence in terms of production facilities, alternative regional production. We are more or less in the stage of finalizing the numbers. So if we agree, we agree, if we don't agree, we don't agree. So this is where we stand today.

So what's the capacity of this feed mill?

That's a trick question [Foreign Language] capacity? Well, it will enhance our capacity by roughly 15%.

15% -- so our current capacity is around 1,800 tonnes per annum, right?

Yes.

Tonnes per day.

Per day per day, yes. Yes.

Another question that I have is on your merger proposal with -- for Atyab. So Atyab Food Industries, you were planning with a merger with a frozen factory. Could you please tell us at what stage are we in right now?

Well, the project is currently on hold. We are -- we have done our initial discussions and feasibility and all of that, and it was felt to keep it on hold for a year at least.

Okay. Because I understand you appointed a consultant. And what is the consultant's advice?

Well, the consultant gave us a few proposals and a few scenarios, which we felt it's better to hold the decision for a year.

Okay. Fine. And on GIPF, we just started operations. So could you please tell us what are the initial results that we are seeing there? And could you please give us a high-level overview of this project? What's the capacity? You're talking about 1 million ton -- 1 million eggs per annum. So if you can give us a little bit more color on GIPF and its initial operations, that would be very helpful.

We'll see the Arabian Food Production Company is a joint venture between Oman Flour Mills, IFFCO in the UAE and Gulf Japan Food Fund, each owns an equal -- the Group consists of 3 farms operating, 2 in Oman, which is Modern Poultry Farm and Gulf International Poultry Farm and 1 in UAE, which is Emirates Poultry Farm. As of the combined production capacity of the 3 farms is about 2 million eggs per day. The GIPF, which was established recently, has went into full production towards the second half of 2024. So the company has now achieved its highest potential in terms of the current capacity in terms of production. We were up to June of last year, 80% of our production used to be exported. Now it's the other way around. 80% of our production is actually consumed in the local market. Anything else you wanted to know?

Yes. So what are the reasons that resulted in the reversal of this trend, the export versus domestic consumption?

Well, the main reason is specific guidelines in terms of what is imported. I mean, the majority of this market was actually covered by imported eggs. There was a slight update in terms of the regulations which worked in favor of us selling more eggs in the local market.

Okay. So could you please tell us what's the demand -- what's the total market size for eggs in Oman? And how -- what is our market share on all these things?

Okay. So the market size in Oman is about 940 million eggs a year... So we're roughly 60 -- 60%... So 940 is the entire demand in Oman. We believe, as per our calculation, the total production in Oman is about 960 million eggs. This is organized and nonorganized sectors. So we are at 102%, 103% of the total market capacity. So we are self-sufficient when it comes to eggs. But we are also exporting to the UAE, Qatar, Kuwait. So these are major destinations for us.

Okay. And how are the realization -- egg realization -- the recent trends in egg realization? Is there a major change? Because you just said that there were a lot of changes in the import regulations. So is it affecting the prices or just prices are still stable?

No, it has improved the prices very well for the locally sold eggs. We have a better realization. The feed prices also have improved over the first half of 2024. So both news looks positive on the organization.

So in terms of percentage increase, what's the percentage increase in your realizations for eggs?

I mean it's a very difficult question to address. But on average, I would say at least from 16.5% to at least 11%. 11% on average. I am bringing numbers on the top of my mind.

No worries. No worries. I just wanted to take the trend, what is happening -- what's happening in the market. And do you think this is a sustainable price levels, 2024 exit prices are very much sustainable for the longer term?

Well, we're hoping to improve it actually. On the other hand maybe a small improvement, maybe 1%, 1.5%, but we are still hoping that we can push it to that ceiling.

So in this case, what -- when do you think GPI will turn profitable at least on the EBITDA level as well as on the net profit level?

They are already profitable since the beginning of this year. So all -- I mean, NPF, GIPF, both are making money, positive bottom line, not EBITDA.

All right. That's interesting. And on the Sohar Flour Mills, I've seen that the Sohar -- you just said Sohar Flour Mills has reported profit of around OMR 900,000. And if I'm not mistaken, Sohar Flour Mills has been reporting losses all throughout the year -- all throughout the previous years. So could you please tell us what are the reasons that resulted in this turnaround of the company? And is it sustainable over the long term?

I think you are mixing up between Sohar Poultry and Sohar Flour Mills.

I was asking about Sohar Flour Mills, yes.

So Sohar Flour Mills, I mean, still, I mean, the situation is as it used to be, I mean, loss-making. Sohar Poultry, on the other hand, showed improvement in terms of profitability. And the performance of Sohar Flour Mills is as known to the -- to everyone is linked to the basically the ongoing dispute, I would say, in terms of splitting the company into 2 assets, silos and the mills.

Okay. Yes, I'm sorry, I just saw that as Sohar Poultry is reporting profits. So what's your strategy for Sohar Flour Mills?

As mentioned by the CEO, I mean, our push is to complete the split. So we split basically the mills and the silos where we, as Oman Flour Mills, take over the mills because we believe we can integrate the mill, I mean, with our own operations and starting to basically make positive returns out of the operations of Sohar Flour Mills.

Okay. And on your -- on your monthly consumption, the data which you have given us right now is 21,000 tonnes medium hard wheat and hard wheat at 3,000 tonnes per month. And during mid last year, compared to the levels that you have been using -- consuming this product during the first half of the year, we are seeing the full year numbers have shown an increase of around 50% in medium hard wheat and hard wheat is more than doubled. Could you please tell us what are the reasons for this?

It's all about timing. I mean, sometimes what happens is close to the reporting date, I mean we -- I mean, it happens that we've received a ship or 2. So that's the only reason why we see these fluctuations. However, I mean, our total storage is always, I mean, steady, and it is in line with the growth in the top lines. Yes, it's just a timing difference.

No, sir, my question was on this consumption. It's not on the inventory that you are holding. The question was on the average consumption -- your monthly average consumption you reported in the first half of the year at 14,000 tonnes. And now for the full year, you are reporting it at 21,000 tonnes, which shows that during the second half of the year, you had doubled your consumption.

Correct, Correct. Last year, we were showing, I mean, 3 variants of wheat. This time, we are showing 2. So we are clubbing 2 types here, APW and medium hard.

Even medium hard, what you have mentioned in June last year was around 14,000 tonnes. And for the full year, the consumption, I'm talking about the consumption. Average consumption was only 14,000 tonnes. And during this full year, 2024, you're seeing the average consumption is 21,000 tonnes.

Yes, I'm not sure which report are you referring to. But I mean, this 2100 is actually for 2 types of wheat here that which we are showing.

Okay. Which are they?

Which are APW and basically the other 12.5 protein wheat.

CW is hard wheat...

So and when it comes to the hard wheat as well, but I'm talking about the same thing, that's what I understand. Hard wheat, you mentioned that your average monthly consumption was around 1,500 tonnes during the first half. And in the second half or for the full year, it is showing us 3,000 tonnes per month. So which essentially means you have more than doubled your production. So is it anything to do with the capacity utilization? Or what exactly?

So first of all, Joyce, I'm not sure which numbers you are referring to because I don't have access to that now, no, I don't have access to the last numbers that you are talking about. But see, I mean, what happens, I mean, the consumption per type of wheat has an impact on 2 things. One is basically the gristing, the formulation of the flour as well as the cost implications. I mean we do basically balance between the different types. So you will see sometimes there is an upscale in one type reduction in the other type. And that's to do basically with the also quality of the wheat sometimes, yes.

See, I'm referring to your presentation last year. It's the same presentation. And now I'm seeing a major difference between the consumption pattern. So I was just trying to understand what exactly was causing this change in consumption.

Okay. Allow me to go back and check.

Okay. Okay. One last question that I have is on your dividend. You've been maintaining close to 100% dividend payout ratio throughout the past several years. And this year, the payout ratio has been reduced. Could you please give us -- tell us what has resulted in the reduction in the payout ratio as well as what should we look for in the future? Should we be looking at going back to 100%? Or will there be any change in the dividend policy going forward?

See, whatever we declared, it equates to 100% payout because I mean 20 -- I mean the cash dividends and the bonus shares will equal to basically the EPS. I mean, so it is giving indirectly 100% payout. So this year, we've introduced bonus shares. And the whole idea is basically to balance between the cash requirements that we need, basically to repay the loans and also fund the growth that we are talking about. So that's why we've changed the policy a little bit. Yes, that's the intention that we keep this for the next period, the same policy is basically 50% cash and 50% through basically share bonus shares.

But sir, you are issuing only 5% bonds, isn't it?

Yes, it equates to 20 pesa, right?

How is it? 5% bonus shares of the capital, right?

Yes.

So 25% plus 5%. So total will be only 30% of the capital will be paid as bonus -- paid as a dividend. That's a combination.

5% of paid-up capital, yes.

Yes. 5% of paid up capital. So every 100 shares will get only 5 shares.

Yes.

That's not 25% and 25%.

That's basically yes.

Sorry?

Yes, yes, you're right.

So you're paying -- essentially paying out only 30 out of your EPS of 50 pesa. Is that right?

Yes.

It's not -- the bonus shares, as I understand, is only 5% of the capital and not 1 share for every 5 shares of every 5 shares. If that is what you originally meant what is supposed to be given.

No, no. Total shares will be, cash plus shares will be 30.

Yes. And your EPS is 50 pesa.

Yes. So that will be yes, 61% roughly.

Yes. So you're not paying 100% of the dividend?

No, no, no.

So going forward, will this be the norm? Or will it be going back to 100% payout?

Yes, this will be the norm. I mean the whole objective is basically to fund the growth as well as also to reduce a little bit the exposure on the loans. If you look at Oman Flour Mills between 2019 and now, there is -- from a debt-free company to almost 52% debt. So we need also to pay attention to that and try to improve the situation over there.

Gentlemen, I have a question, Salman Hussain. I want to understand a bit about the subsidy, which the government provides on the flour. Is this subsidy fixed to certain global price? So if the prices come down to this level, there will be no more any subsidy or this is just a general norm, you will be paid subsidy at all times. And is this linked with the amount of the tonnes? Or how is this calculated?

Okay. So the subsidy, is linked basically to the purchasing price. And any purchasing price above $300,it will be subsidized. Anything below $300 will not be subsidized. And this is for the wheat that is used for local flour production. There is -- anything that is produced, used to produce flour to be consumed in the local market. So there is no tonnage restriction.

And what is the current market price as we speak or the futures contracts?

Well, it depends. I mean, it depends on the wheat variant, and when we are talking about mid $200s to -- mid $250 to $280, $290. the normal wheat.

Below the subsidy level. Okay. Two more quick questions. One, if you can shed light on Oman Fisheries. Have you written off that investment? Or what's going on there? Because in your report, you have highlighted that you have no more control on Oman Fisheries, and we understand the situation of that company. So in your books, have you written off that figure, number one. Number two, if you can shed more light on the handling expenses. As you have shown in your first slide that the handling costs have gone up 24% year-on-year, where the general business on the top line has increased on 7%. So is this a onetime thing, perhaps some special event for this year? Or do you foresee the same happening this year and next year?

Okay. So First question was Oman Fisheries. Okay. So Oman Fisheries, we still have around 500,000 in our books. So that's basically what we are carrying, which is basically less than the market value. So when we lost basically the significant influence, we reclassified Oman Fisheries to available for sale and fair value through P&L, sorry. But we did not basically do the mark-to-market because we don't believe that the market price is a fair price to reflect Oman Fisheries. Going forward, we will keep close eye on Oman Fisheries, and we will provide the necessary provisions as we go in 2025. On the material handling, these are the expenses related to basically the grain handling. So grains are basically handled when we receive them from the ships, then when we store them, and then when we transfer them to basically the production facilities. This year also, in addition to the increase in volume, volume handled was 12% this year higher than last year. Yes, I mean, the top line was 6.5%, but the actual volume handling was 12%. That is one. Second we started also utilizing Sohar Flour mills this year. So that -- this utilization resulted in extra basically handling because we had also to move the grains from Muscat to Sohar, Sohar to Muscat. This is just to test the supply chain. And going forward, once we take over Sohar, we'll be able to use the Sahar facility separately later on. So that will optimize the material handling costs.

That's very good. Lastly, I have a small comment. Perhaps the management can look at it and share it with the respective Board. Following Mr. Joyce question on the dividend and the free shares, my suggestion would be a purely financial suggestion that the company is trading at a 6-year low in terms of the share price. And instead of giving free shares, I personally would love that the company to buy back its own shares and reduce the number of the floated shares in the market and your EPS will definitely go up with that, and take the opportunity of the share being traded at OMR 3.80, whereas your fair value on the balance sheet itself is, and you must be knowing the real fair value with the growth potential and everything. So I think share buyback as a small investor makes sense, of course, but this is something related to the Board and the management, I just want to shed some light on it as an idea. Thank you very much.

So any more questions from the team?

I just wanted to ask what is currently the capacity utilization for both the feed and flour mills?

Okay. So flour mill, I mean, we are talking about 90%, roughly 90% utilization. For the feed, we are around 55% because of the expansions. We've expanded the capacity in 2024. So we added a new seed mill as well as the premix. So the capacity utilization during the year was around 55% for the feed mill.

Right, sir. And that's 55% on the 1,980 per day capacity. Is that right?

Can you repeat?

The 55% feed utilization that you are saying is on the 1,900 per day capacity of feed?

Yes. It's actually 2,160, yes.

Okay. Right. Okay. And do you see the utilization number increasing this year?

So up to last year, I mean, we had a constraint in the capacity. So the entire capacity was dedicated for the local market. Now with the increased capacity that we have, we started basically the export operations. And in 2025 -- 2024 last quarter, we started that, and the same trend is continuing. And we are seeing some promising numbers, I mean, in terms of feed products being exported to nearby countries.

Great. So sir, could you give us a ballpark number of what should we be expecting from this export? Because if I'm going through your last year's numbers, a total of 1 million was recorded in export and sales with the feed mill. So what increase should we be expecting in this year?

Well, it's a very difficult question to address today. But I mean, we're aggressively pushing whatever extra capacity that we have. It becomes a little bit challenging in terms of flour. But in terms of feed, we are maintaining a steady growth in especially exports to Yemen. So we're definitely looking at enhancing that number by at least double digits.

Great. Perfect. And I'm sorry, I'm circling back to my first question. You mentioned the 55% capacity utilization for feed. Was this 2024 number? Or is it the current number?

That's 2024 numbers.

Okay. And could you tell us what the current number is? I mean, obviously, till now, like...

I would say it's above 60%. Above 60%, closer to 68%, and 67% in that range.

Right. Perfect. And the flour would -- number would also be over 90%?

Yes. Actually, we don't have capacity in [indiscernible]. So that's why we are shifting some of the business to Sohar Flour Mills.

Okay. Great.

Well, thank you very much, everyone, for joining us today. It was indeed a pleasure talking to all of you. I hope we were able to clarify a lot of the questions that you had. Wish you a lovely day ahead, and thank you very much.

Thank you all.

Thank you.