Strategy Note /
Saudi Arabia

Almarai Earnings call summary – Q3 22

  • Revenues increased by 21.0% yoy (+3.4% qoq) to SAR4.77bn in Q3 22

  • Management clarified that Almarai increased prices to offset higher commodity costs and not to increase margins

  • Adding that Almarai is well equipped to handle the current challenging market situation

SNB Capital
12 October 2022
Published bySNB Capital

Business performance

  • Revenues increased by 21.0% yoy (+3.4% qoq) to SAR4.77bn in Q3 22, driven by growth across all segments and regions.

  • Poultry and bakery segments were the main drivers of growth with 43% yoy (+5% qoq) and 32%% (+9% qoq), respectively.

  • Long life dairy sales increased by 26% yoy (31% qoq), while 16% yoy growth (-12% qoq) was witnessed in fresh dairy. Food, fruit juice and others grew by 12% yoy, 9% yoy and 13% yoy respectively.

  • The management attributed the improvement to better trading conditions post COVID-19 related restrictions, opening of educational institutions and higher number of visitors in the region.

  • The growth in revenues included price growth of 13% yoy, volume growth of 3% yoy, product mix effect of 4% yoy and other growth of 1%.

  • The prices increase was implemented in line with commodity cost increase in respective categories.

  • Volume growth of 3% was driven by poultry, bakery and long-life dairy segments, while some volume attrition was seen in fresh dairy segment. As compared to 2019, the volume growth was at a CAGR of 3-4%

  • The product mix effect is mainly due to the return to normality post the pandemic.

  • Geographically, Jordan recorded the highest sales growth (+27% yoy), followed by Saudi (+22% yoy) and UAE (+20% yoy). Kuwait, Egypt, and Oman recorded a revenue growth of 15% yoy each. Bahrain recorded revenue growth of 7%, while other countries grew at 29% yoy. Saudi contributed 63% of total Q3 22 sales.

  • In Q3 22, modern trade grew by 13% yoy vs traditional trade by 21% yoy, while food services and others/ export grew by 33% yoy and 19% yoy, respectively. In terms of total contribution, traditional trade contributed to 56%, while Modern trade, food services and others contributed 20%, 16% and 8% respectively.


Key segments related highlights

  • Dairy and Juice

o    Revenue increased by 15% yoy while the segment profit grew by 12% yoy with 12% net margin.

o    Sales were driven by performance of all products across the board supported by return to school and tourism activities.

o    Cost pressures were high due to 1) higher feed (corn and soya) costs 2) higher dairy commodities costs (mainly butter) 3) higher transportation costs.

  • Bakery

o    Revenue grew by 32% yoy, of which 5% was inorganic and 27% was organic growth. Profits grew by 46% yoy with a 18% net margin.

o    Sales growth was primarily driven by full resumption of educational institutions in Saudi and the GCC leading to increase in single serve products sales and general volume growth.

  • Poultry

o    Revenue grew by 43% yoy while profits were up remarkably by 173% yoy with 12% net margin.

o    Volume growth was driven by additional capacity.

o    The Q3 22 poultry capacity stood at 225mn birds on an annualized level compared to 200mn birds for the last 4 years. 

o    Poultry market share increased to 32% (Aug 2022) vs 31% in (Dec 2021) and Almarai retains its number 1 position.


Financial Performance

  • Gross profit stood at SAR1.49bn (+16.7% yoy), with gross margin declining to 31.2% vs 32.4% in Q3 21 and 31.9% in Q2 22 due to higher feed prices and commodity costs.

  • EBIT came in at SAR579mn (+11.6% yoy) representing a margin of 12.1% vs 13.2% in Q3 21 and 14.0% in Q2 22.

  • Net income stood at SAR463mn, up 13.2% yoy and reflecting a margin of 9.7%. The yoy increase in net income was mainly driven by higher pricing (SAR508mn) and volume mix (SAR83mn) and was partially offset by commodity cost increase (SAR408mn) and operational costs increase (SAR123mn).

  • Operational costs included SAR82mn one off costs related to an investment in Argentina.

  • Higher interest costs were offset by a positive impact of existing zakat provision.

  • Capex increased 28% yoy to SAR320mn in Q3 22. Capex to sales stood at 9% in TTM Q3 22, vs 9% in 2021 and 6% in 2020.

  • Working capital stood at SAR3.64bn, 20% of sales in TTM Q3 22, vs 16% and 21% in 2021 and 2020, respectively.

  • Free cash flow increased to SAR931mn in Q3 22 vs SAR832mn in Q3 21, due to improved operational performance. Q3 22 TTM FCF came in at SAR2.02bn, 11% of sales, vs 20% and 18% in 2021 and 2020, respectively.

  • Net debt stood at SAR9.6bn at the end of Q3 22 vs SAR9.2bn at the end of 2021.

  • Net debt/ EBITDA was 2.6x as of Q3 22 (in-line with 2.6x in 2021), TTM EBITDA in Q3 22 stood at SAR18.14bn vs SAR15.85bn in 2021.

  • Average debt maturity tenure currently is 4.1 years. Almarai refinanced debt of SAR1.6bn this quarter, increasing the maturity beyond 5 years. The proportion of debt with banks, government institutions and Islamic bonds is 67%, 14% and 19% respectively.


Other comments

  • The management clarified that Almarai increased prices to offset higher commodity costs and not to increase margins.

  • The management has been managing inventory by reducing the number of stock based on the number of days. However, inventory valuation has been high due to costs inflation despite costs control.

  • Almarai has been actively managing working capital to ensure availability of supply in the current challenging macro-economic situation. The management clarified that Traditional trade, which is done on a cash basis, is better from the working capital point of view.

  • The management clarified that margins in Egypt and Jordan are lower than the GCC.

  • The management is encouraged to see the positive impact of volume growth despite an increase in pricing, thus exhibiting consumer loyalty.

  • Long life dairy segment is also going through a price increase. The management highlighted that the premium for fresh milk over long life milk does not exist currently. Almarai doesn’t receive subsidy on dairy.

  • The management clarified that Interest costs of 58% of the total debt is fixed and the effective interest rate stood at c3.8% in Q3 22 vs 3.0% in Q2 22.


Poultry segment

  • Almarai has increased pricing on poultry in response to market situations. In Q3 22, the price increases have been in the HoReCa category while retail pricing remained unchanged.

  • The management clarified that in terms of value of revenue, the market is split evenly between HoReCa and retail whereas in terms of sales volume HoreCa comprised 58% while retail is 42%.

  • In Q3 22, Almarai received a SAR20-25mn higher subsidy on poultry yoy. The management clarified that these subsidies are on a cash basis and the amount and continuity depends on the regulatory authority.

  • The Q3 22 poultry capacity stood at 225mn birds on an annualized level compared to 200mn birds for the last 4 years. 

  • Poultry capacity is expected to expand by 5-10% by the end of 2022 and Almarai is expected to add 10-15mn birds in H2 22. The capacity additions were achieved through redesigning existing infrastructure.

  • Over time, Almarai expects a capacity increase of 450mn.

  •   Almarai also intends to expand into the frozen poultry segment.

  • The above expansions are excluding the expansionary capex of SAR6.6bn.

  • The management clarified that the delay in poultry expansion project of SAR6.6bn was related to logistic issues and expects it to take -1-2 years to bring capacity on board. This expansion will be done in phases.


Expectations and outlook

  • The management expects increasing cost pressures in the near term due to ongoing inflation and may accordingly have to revise pricing.

  • The management clarified that dilution in margins comes mainly at gross margin level due to commodity costs increases and this should be mitigated by pricing increases.

  • Despite Almarai’s active hedging, the management is concerned about the cost inflation and expects farming costs to continue to be high next year.

  • When the high cost situation normalizes, product price will be adjusted accordingly, however, it may not be immediate due to the longevity of the impact of inflation.

  • Almarai will work on refinancing the Sukuk of SAR1.9bn maturing in 2024f.

  • The management anticipates an increase of 100-125bps of interest rate depending on maturity.

  • Capex continues to decline with the current 5-year plan and new capex is mostly maintenance related. The management expects capex to be in the range of 7-9% of revenue.

  • The management ascertained that Almarai is well equipped to handle the current challenging market situation.