Salalah Mills Company SAOG (SFMI) Earnings Call Transcript & Summary

I'm pleased to welcome you all to this discussion session. We will start Mr. Ravi, the Chief Executive -- Chief Financial Officer, will present the financials for 2024. And after the presentation, there will be -- we will open the questions for any question that you have. We will be pleased to answer. Please, Mr. Ravi, you can start.

Thank you, gentlemen, for your time and attending this our interactive session on financials briefing for 2024. We had our Board meeting last month, and our financial for 2024 was approved by them. And subsequently, we have uploaded on the FSA website. So I'm sure that you would have gone through that. So this session, basically, we will just highlight the numbers in a very brief way. And we'll also talk some of our key highlights, our achievements in last year and then CEO will update some way forward our plan for the next year. We will start with our agenda, I mean, the brief agenda that we have for today. We'll show -- with the Group structure. I mean now that we have added a couple of company within the Group, so we'll show how the structure look like and then key highlights for 2024, following which we will give you the performance for 2024 by line of activities and then the consolidated for parent as well as Group and then the business prospects and outlook for next year. And then we will open the question and answer session. So to start with, this is our Group structure. So we have a Salalah Mill Company, which is our parent company, and it has 4 divisions within it. We all know that. We started from the Flour Milling, then we added the Macaroni manufacturing production, then PP bag manufacturing plant, which we added capacity also into that last year and then the Animal Feed production. So these 4 activities are very much part and parcel of the Salalah Mills company, which is a parent company. And then that parent company has 3 subsidiaries, 2 are already in place that is Salalah Laboratory and then the Salalah Grain International based in Dubai. And the food development company is the third company within the Group, which is a subsidiary. It's still under incorporation stage, but this company will take over the assets of our bakery, Industrial Bakery project, which is also almost ready. And then this year, we also invested into a company in Yemen, which is Al-Rayyan Flour Mill. So we have a stake of 50% into that company. So we have -- we classified that as associates. So these subsidiaries and associates, their numbers are clubbed into our parent company and consolidated also, which you would have seen on the FSA website. The key highlight for 2024 was we invested into Al-Rayyan business, which is Yemen. It is a greenfield flour Milling company. We acquired 50% stake into that company by paying OMR 2.5 million. And we have also paid them OMR 2.5 million as a debt-free -- interest-free debt, which is repayable out of the profit over a period of time. And the project is up and running. The first year was 2024, and they have shown a marginal profit of OMR 55,000. The second highlight was we issued equity of 20% equity amounting to OMR 12.5 million to Solaris, one of the strategic investors into Salalah Mill. That was in the H2 2024. Wheat subsidy scheme, which government launched in 2022, they have extended it for the third year. But for the second year, we claimed OMR 12.5 million -- sorry, OMR 5.2 million, which was received in January 2025. We still -- we are yet to receive another OMR 1.4 million for the first year subsidy. We are talking to them. Wheat price was quite stable in 2024, and that was good for us because prior year 2023 are very bad for us. Wheat that we bought was very expensive. So that affected our profitability. But 2024, the price was stable. Supply chain was also stable. So we can see that improvement into our margin. Macaroni business H2 2024 was better. We focused to capture the market share in Africa and Yemen. So our strategy works and our volume for H2 2024 was better than H2 -- I mean 2023. So that has contributed to our margin this year, sales and margin both. Salalah Laboratory and Industrial Bakery project, these are the 2 project that we started implementing in 2023. And in 2024, substantial portion of that was completed. It's still not ready for operation or production, but mostly -- most of the job is done. So Salalah Laboratory, we will start the commercial testing in Q2 2025. And same goes with the Industrial Bakery project also. Now the key financial highlight for 2024. In terms of volume, we sold 480,000 metric ton, which is around 50% more than the same period last year. Gross margin was OMR 7.7 million this year, again, 46% higher than the same period last year. Revenue was OMR 84 million this year, which is 29% more than the last year. And net profit, we had at the parent company level, 1.3 million, which is -- last year actually was bad year, as I said in the beginning because of the wheat price and supply chain instability, there was a challenge. So this year, we have done a profit of OMR 1.3 Million. EBITDA for the year is OMR 6 million, which is 25% more than the last year. And selling, general and administrative expenses is slightly higher because the focus was to promote the sales. So some overhead basically related to the sales and distribution has increased. Therefore, it is 6% compared to 5% last year. Balance sheet key financials. Our current ratio has improved to 1.61% as compared to 1.47% last year. Quick ratio is again more than 1% and the return on equity is 3%. Trade receivable has shown improvement. Earlier, it was 16 days more than last year. Now we have 56 days receivable holding. And the inventory is less than 90 days, it is 6 days now. There is an improvement of 8 days in inventory holding also. Gearing ratio is 1.12 is better as compared to 1.2 last year. This pie shows the volume, revenue, gross margin and EBITDA by line of activities. So Flour contribute a lot as you see in all the pie, you'll see the flour is contributing in a greater proportion. If I talk about the volume out of 483,106,00 comes from Flour. And bulk wheat, we have also bought and sold bulk wheat of 109,000 ton, PP bag 5 ton -- 5,000 ton, Pasta 35,000 ton and Feed is 23,000 ton. Revenue contribution out of OMR 84 million, OMR 57 million is coming from Flour and OMR 12.33 million from the bulk wheat, OMR 7.6 million from the Pasta, OMR 3.97 million from the PP bag and OMR 2.65 million from the Feed. Gross margin if you see the contribution of OMR 7.7 million, OMR 6.7 million is coming from the Flour and bulk Wheat Feed is contributing OMR 109 million, PP OMR 712,000, Pasta OMR 127,000. EBITDA of OMR 6 million out of which OMR 4.2 million is from the Flour. Feed is OMR 190,000, PP OMR 795,000 and Pasta OMR 721,000. This is a comparative sales, volume and value, so last year versus this year. So in 2023, our volume -- our Flour volume was 82% to the total, which increased to 87% in 2024. And revenue wise Flour was 80%, which increased to 83% in 2024. These numbers are now the detailed number. Again, it is extracted from our audited financial statement. I will just read some of the key numbers for you. Total sales, as you said, is OMR 83 million as compared to OMR 64 million last year. Gross margin is OMR 7.7 million as compared to OMR 5.2 million last year. We improved the gross margin. One of the reasons is the wheat price was stable. EBITDA is OMR 5.9 million as compared to OMR 4.7 million. EBITDA percentage is 7%, which is quite consistent. Finance cost is reduced this year because the rate of interest came down in the second half of the first year. We aggressively negotiate the price with the bankers and thanks to the bankers who listen to our request. So there has been a good improvement in the finance cost. Last year, it was OMR 1.9 million. We got OMR 1.6 million this year. And net profit after tax is OMR 1.3 million, OMR 1.4 million. Last year, it was nearly OMR 181,000. And there is a loss in the fair value of the investment that we have classified into OCI. That amount is OMR 1.6 million. So this has been shown into our equity. We have compared the H1 number with the H2 in this slide. So H2 second half was better than the first half. One of the reason -- main reason, as I said, is the wheat price came down in the second half of the year as compared to last year. So that has improved our gross margin. So profit before tax, if you see before the OCI, it was OMR 313,000 last year, which went to OMR 1 million in second half. Our revenue by geography. So out of OMR 83 million, OMR 84 million sales that we have done, OMR 42.5 million is coming from the domestic market. Africa contribute OMR 18 million and Yemen is OMR 21 million, then the other small country is 1.3 million. So if you see we are trying to gain the market share from OMR 36 million in Oman to OMR 42 million. So everywhere there is an improvement. This is the profit for the Group as a whole. So for parent company, the profit is OMR 1.388 million and then SCI DMCC Salalah Grain International DMCC has done -- is one of the subsidiary from where we got OMR 35,000 positive. And the Laboratory, which is still under implementation is, but some of the expenditure, which is not capitalized is OMR 73,000. So at the Group level, our net profit for the year is OMR 1.35 million. Balance sheet highlights current liability and total liability. Out of current liability, we have a borrowing, which is a major chunk, OMR 32 million. Last year, it was OMR 27 million. There is an increment of OMR 4.6 million, and this is basically to support our working capital because we are holding the inventory and good debts. Trade and other receivable has also gone up from OMR 3 million to OMR 5 million. This includes the subsidy of OMR 5 million. Sorry, [indiscernible]. So it's a trade liability of OMR 3 million to OMR 5 million. I mean for our operation only it is. And then on the noncurrent liability, the borrowing is OMR 17 million. This is largely for the bakery business. Last year, it was 11 million. We borrowed further from the Oman Development Bank. Nothing more to talk here. On the asset side, we have current assets and noncurrent assets. Current assets comprises of inventory, which is our major investment from OMR 16 million to OMR 20 million. These are investments in the wheat inventory. We carry around 90 days inventory. The business demand that. The trade and other receivable is OMR 25 million, that includes OMR 5 million -- OMR 6 million government subsidy. Out of OMR 6 million, OMR 5 million we have already received in January 2025. Then we have invested in equity IPO, equity of -- was okay with the fair value of that is OMR 10.7 million. Then the related party balance OMR 2.6 million basically into the subsidiaries and associates. And there was a cash in hand OMR 2.6 million. So that is the total current assets for OMR 61 million from OMR 45 million. So basically, this increase is coming because of the investment into OQR -- OQEP equity. On the noncurrent asset there is a increase in the PPE from OMR 30 million to OMR 35 million -- OMR 34 million basically into the bakery project. And investment in associates as we said in the beginning that we have invested into Al-Rayyan Yemen so OMR 2.5 million into equity and also similar amount into the debt of the same company. And then last OMR 1 million was invested into the Laboratory. So that makes the total of OMR 43 million as compared to OMR 36 million last year. This is the net worth statement. You see that share capital has gone up from OMR 5 million to OMR 17.5 million because of the OMR 12.5 million, which we issued to Solaris. And then this fair value through OCI that there was a fair value loss in the investment of OQEP so that has shown into the equity. This is the cash flow statement, nothing to talk much. Subsidy statement because this is the third year of the subsidy scheme, which government announced in May 2022. So the first year, this amount is in U.S. dollar. So the first year, our claim was $16 million, out of which $12.4 million was paid, still $3.6 million is outstanding. For the second year, $13.5 million was claim and they paid fully, thank to them. And as on date, as on 31st December 2024 is still $4.4 million is outstanding. So that was in a nutshell the financial grace. I will ask CEO to update some project progress and maybe some our way forward for 2025.

Well, thanks God, the results in 2024 was much better than '23. '23, we faced a lot of challenges which affected our margins. '24, we have done, I think it's good achievement. And we expect in '25 to be much better than '24 also. With regard to the Industrial Bakery, which now going to be a separate company, separate legal company. We call it food development company. And it is in the trial stage now. And hopefully, in the second quarter, we'll move to the commercial production. With regard also and we expect also to get all the certification by end of June, which allow us also to export our product to GCC countries. With regard to Salalah Laboratory also the setup completed. And we also get some certification. We get also the approval from the Ministry of Commerce and Industry. And now we are also hopefully, in the coming few months, we'll get the ISO certification for the lab. So we can also start doing the analysis and test for all the products. Regarding our investment in Yemen the mill started production in February last year. It was the first year. And thanks God, the first year, there was -- there is a profit. It's a small profit, but taking into consideration all the challenges that the project had faced in Yemen and to make a profit from the first year, that's a good achievement. And this year, we hope that the results will be much better than last year. There's already the first 2 months, the profit is more than double than last year which we made for the full year. The 2 months this year is much better than the full year of last year. I think now we will open the stage for the questions. If you have any questions please start.

Any question?

Could you please tell us the terms for your subsidy mechanism? How is it calculated? What is the price that -- what's the minimum price --procurement price for the company that is required for subsidy to trigger? And what was your average price -- wheat price during the year? I'm talking about the mechanism, the details of the mechanism, how is it working? And how are you accounting for this subsidy amount that when it comes in?

Subsidy as per the letter we received from the Ministry of Agriculture, the cost of the wheat is more than USD 300 per metric ton. The government will pay if it's more than USD 300, USD 300 and below there is no subsidy. And the government have -- with the cooperation of consumer protection, they fixed the price. So we are not able to increase the price. The price is fixed in Oman for the flour. So the difference is what we pay more than USD 300; that's what we claim from the government. But with this subsidy, there is also associated cost because we have to pay the suppliers before we receive the wheat, and we have received the money or the subsidy from the government more than 1 year, maybe between 1 year, 2 years after that. So there is cost -- a financial cost to us. Plus also, we are required to maintain 80,000 metric tons of wheat in our silos for the country reserve -- strategic reserve. And that 80,000 also belongs to us. It is our own wheat, but we have to keep that quantity of wheat and that's also cost because we already paid for that money. And also, to keep that 80,000 in our silos, it is also involved other cost to maintain that stock. So this is usually the procedures, and we have to supply to -- send our claims to the ministry. And there is independent auditors who are appointed by the Ministry of Finance which came to our offices and they audit all the documents that they asked for. And after that, they will make the report to the ministry. And based on the report, we will get the money. We have 1 issue or 2 issues with still that pending about OMR 1.4 million. We have some dispute with the government, the ministry regarding the interpretation of the clause because the subsidy started from 1st May, and stock -- the auditor, the stock on 1st May was not accounted. This is one point. Second point is that the price we are about 50% our sales is the local market, but we have 50% of our sales in the export market. So, in the first year, the auditor have taken the average cost for export and local. But the second year, the auditors as per our request, they have taken only the cost of the wheat that is sold in the local market. So, still that point, USD 1.4 is pending with the ministry, and we are following up with them. So I hope my answer was clear to you.

Yes, sir, it was clear. So, could you please explain how is this accounted? Are we accounting it only on an accrual basis? Or how is the cost accounted for this OMR 5 million? Will it only having -- will it only have a cash flow impact? Or will it have an impact on the P&L statement as well for the 2025 first quarter?

So what we do every quarter, we do the accounting, 4 time in a year. So, at the end of the quarter, we see, as CEO say, there is a lot of condition attached to the subsidy. There is -- apart from what he said is the maintenance of the inventory, there is 1 condition is that all the wheat that is -- I mean subsidy, we are claiming that wheat should be used for the domestic production only. And since we have export sales also, so we have to segregate the export component of that. So at the end of the quarter, we see that how much quantity of wheat was used for the domestic production and see and how much was for the export. So, whatever is used for the domestic consumption, we do the systematic calculation of that because multiple type of wheat we blend together to make one type of flour. So it's very complicated process. But to explain you in a simple way, at the end of each quarter, we do that exercise. And then we...

We are doing monthly, but we claim it every quarter.

So we debit to the subsidy receivable and credit to the cost of goods sold. So basically, our raw material consumption gets reduced to the extent of our claim. And when money is received, we again debit to the bank and credit to the subsidy receivable. This is the accounting inventory we do.

Okay. Got it. And what was the average cost of wheat cost during last year?

Inventory holding cost and inventory purchase are 2 different thing because we consume what we hold. And we are required to hold 80,000 inventory. So always, our consumption is more than USD 300 or maybe our inventory holding cost is more than USD 300. But the new purchases in 2025 -- 2024 is less than USD 300 or slightly more than USD 300. Maybe CEO you can add more on that.

We cannot disclose how much our cost and how much is the subsidy as per ton. But in amount, it is clear, but we will not be able to give you exactly what is our cost and what is the subsidy amount -- price.

Okay. I understood that. And also on your Industrial Bakery product, could you please explain what's the percentage of stake that you will have in this company? Because what I understand is you are doing it with Atyab, and Atyab -- Oman Flour Mills will be spinning off, carving out their Atyab bakery and then putting their investment as some -- as Atyab in kind, and you have to build a factory in -- the new factory. So, could you please give us an overview of how it is going to shape up? And what are the -- what are the market outlook that you have for the Industrial Bakery project?

We appointed a reputed office to evaluate the 2 projects. And they gave the first report, but that is still under discussion. So we'll not be able to disclose what is the valuation done. But I think this matter will take some time. I think we are in the view that -- the project is still not a commercial business. And I think this matter will not take a quick decision on this, I think we will wait maybe until the end of the year to agree on the valuation method.

Okay. So until that, you are expecting the Industrial Bakery to start commercial production by the second half of next year, that is within the next 3 months' time or maybe so Q2, Q2 of 2025. So until you reach an agreement, will you be competing with Atyab and introducing your products to the market? Is that the idea?

Actually, we are doing our own because as the CEO said, the discussion is still on and we have not agreed that whether they will sell our product, we will sell their product, that's not the understanding. So they will continue to sell their own product with their own arrangement and we will [ selling ] strategy. We are not going to add their product into our product basket and vice versa. So we are having our own selling strategy, distribution strategy, distribution network. They're -- they will have their own. So we are not thinking of combining while we are still discussing. We will combine when the discussion is completed and the agreement is aligned. But until that, we both are independent, and we are not combining any activities.

Okay. Got it. On the Al-Rayyan Mill, you said the first 2 months performance has been extremely well as compared to last year. But the situation there has changed overnight, over the last 48 hours or so. So what's your outlook on the Al-Rayyan going forward? Are we likely to witness the similar kind of performance in the first 2 months going forward? Or will there be a probable downturn at least in the short term? My question is, are the developments in Yemen going to affect the performance of Al-Rayyan Mills?

Al-Rayyan Flour Mill is located in Mukalla, Mukalla is South Yemen. And South Yemen there is no issue, no security issue is there. The main issue is in the North, far from the South. So we don't expect any issues with the coming -- with the new development that's happening now. I think business is [indiscernible] it could be an opportunity more than 1 threat to us.

Okay. Got it. Understood. On the Salalah Laboratory project...

If someone else have any questions? Anyone have any other question, please? Okay, Ravi, you can continue. It seems there is nobody is having other question.

Thank you Mr. Ahmed. And on the Salalah Laboratory project, what are the services that this project will be giving for the customers? And will it be primarily for captive consumption? Or are you planning to offer your services to outside clients and which are the markets? If that's the case, which are the markets that you will be targeting?

See, there is no major laboratory here in the south, south of Oman and the Dhofar region. This is the first big and qualified laboratory and even our product, we have to send before to Muscat and to Dubai to -- make their own analysis and test. With this new setup now, any test we can do here in Salalah and it will be very -- for a short time instead of sending it to Muscat or to Dubai and takes 1 week or more. So the aim is to provide services to all the Dhofar region, not only Salalah, but all the customers any product that is made in Oman or that is imported also from outside. So this is the idea for the lab and Mr. Ravi you can add something on that?

Yes. So this project will cater to the needs of the entire Dhofar region as the CEO said. And our laboratory is equipped to test everything what is required to be tested from the regulation point of view. All the food product are required to be tested. There are some non-food item cosmetic-related product. Those are also required to be tested. So we have a capability to do that testing also. We are partnering with the institutional company, all the major companies here, those who are into water production, food production, dairy product and also with the port authority. So anything as CEO said that there are regulation which require that most of the imported product also require testing before it is offloaded. So those kind of business will also be shared to us by the port authority. So this is going to be a very unique business. It might take a little time to educate the people because people are not fully aware that what we can do and they are currently going to Muscat and the UAE market for that. But once they have seen our facility and tested it, of course, they will be satisfied and all those business will be give. So we are in the process of educating the customers and finding some sort of partnership, some sort of alliance with the customer. So this is what about the laboratory.

Yes. And 1 last question that I have is on your private placement last year, Solaris took a significant stake in the company. What are the benefits that you are seeing or are we seeing from Solaris taking a stake in the company? Because it's -- for me, Solaris is a commodity trading firm and you are a consumer as well as you had some plans for starting commodity trading business earlier. So what kind of benefits are we seeing from the investment by Solaris in Salalah Flour Mills? And are we -- when are we expecting these kind of benefits to start coming in?

See the Solaris is -- I think now is #1 supplier of wheat from Russia. I think last year, they exported about 12.5 million metric tons. So it is the biggest company. And to be associated with the main supplier, it hels us to secure our needs for wheat. And with regard to price -- pricing, we are free. I mean, Salalah Mills Company is an independent company. And whenever we find any better price in the market, we can buy from any supplier. So there is no limitation to Salalah Mills. But to be associated, as I said, with the main supplier, just to add to the security of our wheat purchasing. Other thing also which might be of help to us, we can have regular reports from them on the market and how they can see the market as they are specialized in the export, it is helping us also to get some information that we will not be able to get from other suppliers. I think someone else want to ask a question.

So have we started transaction of -- started any transactions with Solaris or we still studying the market and getting the reports and everything? I mean in terms of monetary transactions and the commodity transactions, have we done anything? Or are they still advising us?

We were buying from Solaris before this partnership for a couple of years when they started the business, we have been with them for a long time. So we know them. But as I said, we are not confined to them only. We can -- we are free to buy and whenever we have a better price, we can buy from anywhere. So -- but having them as a partner and our shareholders that gives us also more confidence in the market.

As CEO said earlier that our procurement process is very transparent and we pass through a very competitive bidding process. So they are one of the preferred vendors we can say, but they are not the only vendor. So when we buy any lot, we give the equal opportunity to everybody, everybody quote their price. And only preference we give them, let's say, that if some other vendor has given a lower price than the Solaris, then we ask them to look at it and then reprice. But in case if -- after that also, if their price appears to be more than the competitor, then we are free to buy from the company.

Any more question? I think we have come to the end. We thank you very much for the participation in this session and looking forward to meet you all next time.