Earnings Report /

Domty: Q2 20 conference call highlights — Healthy top line despite challenges

  • Revenue grew by 10% YoY despite the slower demand due to curfew measures and Ramadan season

  • Bakery volumes started picking-up in 3Q and margins started rebounding to normal levels

  • Working capital days were extended in 2Q, reflecting in a higher debt and interest expense balance

Al Ahly Pharos Securities Brokerage
13 August 2020

Healthy topline performance despite many challenges

  • DOMT was able to achieve c.10% YoY increase in topline in 2Q20 despite witnessing slower sales from key demand pockets like tourism, restaurants, supply ministry and student-age demographics, in addition to slower traffic to small groceries and kiosks due to the curfew and weak demand during Ramadan season.

  • Cheese sales saw annual and sequential growth owing to the company's focus on the premium 'Domty plus' SKU, which grew by 35% YoY during 1H20, and due to the success of the mozzarella SKU which has been operating at full capacity for 9 months in a row.

  • In anticipation for higher demand in 3Q20, the company commissioned another mozzarella line, which will add a capacity of 55-60 tons/month by mid-August 2020.

  • Government sales for the quarter dropped to 13% from the usual 20-25% contribution, however the local market was able to absorb these volumes to a large extent. 

  • DOMT's juice portfolio saw a softer drop in volume compared to the market and an improvement in market shares as a result of synergies with the distribution of the sandwich product. The company plans to launch 3 new juice flavors this month, capitalizing on the recent easing of lock-down measures. The recent packaging agreement with Rani Beverages will also help satisfy the company’s goals of raising utilization rates and solidifying its positioning in the juice market.

  • Although the circumstances were not in favor of the sales of the bakery portfolio, the company was able to grow its revenue by 84% YoY, following the addition of a second production line in 1Q20 and by the company's persistence to remain on ground to maintain its market share.

  • Starting July, both sandwich and bread volumes have picked-up and utilization rates have climbed back to c.90% and margins have reverted to the 33-34% territory. Management will bring the previously installed 3rd production line online if demand remains strong throughout August.

Cost pressures to subside by 3Q20

  • Bottomline came in lower than what was initially expected, as the company sacrificed sandwich margins in order to remain competitive. Additionally, DOMT needed to absorb the extra costs associated with keeping the factory open amidst the pandemic and the fixed costs relating to the 3rd bakery production line which did not start generating sales yet.

  • Starting July, management decided to embark on a cost-cutting plan across all departments in order to compensate for the expenses that were incurred in 1H20 and not initially planned for. They also downsized the labor who were initially allocated to the additional bakery line, reflecting in an anticipated 1% drop in S&D/revenue by 3Q20.

  • The company had proactively increased its inventory levels by 1 month at the start of the pandemic. Additionally, the increase in receivable days on hand could be traced back to shift in channel mix due to: 1) lower sales of the cash-based sandwich product and 2) the smaller window of operations of small groceries and kiosks versus key accounts and hypermarkets.

  • The company’s higher debt balance for the quarter is as a result of 1) the investment in treasury bills prior to the reduction of interest rates and 2) to finance the extension of receivable and inventory days. Leverage is expected to decline as less working capital is needed.