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Edited Transcript of 2280.RI earnings conference call or presentation 21-Jan-20 1:00pm GMT

Q4 2019 Almarai Company SJSC Earnings Call

Jan 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Almarai Company SJSC earnings conference call or presentation Tuesday, January 21, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ikram Ulhaque

Almarai Company - Head of Finance

* Majed Mazen Rasheed Nofal

Almarai Company - CEO

* Paul-Louis Gay

Almarai Company - CFO

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Conference Call Participants

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* Adnan Farooq

Jadwa Investment Company, Research Division - Analyst

* Duaa AlFadda;Riyad Capital Company;Analyst

* Hala AlFaris;Saudi Kuwaiti Finance House S.S.C.;Analyst

* Hamad AlNafisi;NBK Capital Asset Management Egypt;Analyst

* Meera Reddy

Securities & Investment Company BSC, Research Division - Research Analyst

* Mohammed Al-Hadhrami;FALCOM Financial Services;Analyst

* Nada Amin

EFG Hermes Holding S.A.E., Research Division - VP of Consumer and Retail

* Saul Anderson Rans

Morgan Stanley, Research Division - Senior Research Analyst

* Taher Safieddine

Citigroup Inc, Research Division - VP

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Presentation

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Operator [1]

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Good day, and welcome to the Almarai 4Q and FY 2019 Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mrs. Nada Amin. Please go ahead, ma'am.

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Nada Amin, EFG Hermes Holding S.A.E., Research Division - VP of Consumer and Retail [2]

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Thank you, Monish. Hello, and welcome, everyone, to Almarai 4Q 2019 Results Conference Call. My name is Nada Amin. I'm part of EFG's consumer and health care team. It's our pleasure today to welcome Mr. Majed Nofal, the company's CEO, on the line as well as Mr. Paul Gay, the company's CFO. In addition to Mr. Ikram Ulhaque, the company's Head of Finance. They'll begin with the presentation, and then we will open the floor to Q&A. Mr. Majed, please go ahead.

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Paul-Louis Gay, Almarai Company - CFO [3]

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Okay. Ladies and gentlemen, thank you, Nada, for joining. We'd like to welcome you to the Almarai earnings conference for the full year ended December 31, 2019, which today is organized by EFG Hermes. I would like to take this opportunity to present to you all our best wishes for 2020. I think it's not too late for that. For those who have been unable to download the presentation, please do go to the almarai.com website, Corporate, Investors, Earning Presentation and you will find the document. I would like to give the opportunity now to Majed to provide you with an opening remark.

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [4]

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Hello all, this is Majed. Before I discuss 2019 in detail, let me first put this year into context. The last 2 quarters of 2018, after the price increase in dairy by Almarai, were not easy. Consumer sentiment remained weak during the first part of 2019. But we did saw some positive trends starting mid-2019, was proved more positive than initially in results. The market presents a positive territory slowly, but the turnaround was indeed gradual and growing as the year progressed.

This was more [obvious] in KSA, but less so in the other Gulf countries. In KSA, the second half resulted in a much better performance when we entered a like-on-like territory post price increase. This was affected by a very dedicated effort by our sales team in food service. A subsidiary, which continues to serve our traditional retail channels and driving our growth going forward. This is expected to be stronger. And of course, it has been influenced by our sugar tax reforms from 1st of December, which has affected slightly our quarter performance. Continuing the market trends from all -- lower than all other GCC countries have shorter results. Bahrain implemented VAT in Q1 2019, resulting in lower market growth year-on-year, although it presents a positive growth in Q4. Kuwait has reopened to Saudi poultry from second quarter which has given us quite a push in the second half of '19. Egypt is on a better track, and we hope it will also -- the stability in the economy of Egypt will bring us something in the future.

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Paul-Louis Gay, Almarai Company - CFO [5]

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Thank you, Majed. I would like us to move now to Page 7, where we could see in numbers, the rebound that we noticed some weakness during 2019. We have seen positive trends throughout 2019. And while the last few months have shown a steady Gulf trend, we remain reasonably confident of the continued consumer recovery, mainly in KSA. The other Gulf countries, however, have been showing sign of weaker consumer demand and further, the Egyptian markets are getting stable, while we are not yet at a pre-devaluation level.

If we move to Page 8, you will see that in this context of market, Almarai is maintaining -- has been able to maintain the market leadership in almost all the categories that we operate. But in UHT milk where we are traditionally #2, and juice, regarded as the total juice category, we are and we remain #1 in all categories.

I would like to pass it on now to Ikram to discuss in detail more of the business performance.

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Ikram Ulhaque, Almarai Company - Head of Finance [6]

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Thank you very much, Paul. Thank you very much, Majed. So ladies and gentlemen, if you can please move on to Slide #10, where we will talk about the main events. In the context of broader markets and explain the margin in Gulf, I would like to focus on outlook Almarai did within this environmental context.

So I'll start with the first 5 things very briefly. The very first thing is fresh dairy, we remain a dairy company at core. So fresh dairy in KSA continues to rebound and it outperformed, especially in the normalized second half. After the price increase on 1st of July 2018, the litmus test for us was Q3 and Q4, where Almarai fresh dairy did exceptionally well. Discounting in the UHT milk, as Paul was referring to in the previous slide, continues to stabilize. The market continues to become better, although the discounting still continues. Volume growth in Bakery helps Q4 remarkably well. And you will see a revival in operating profit on the Bakery segment going 3Q. Poultry growth continues for the third straight year, both on top line and bottom line. EBIT percentages are well in truly into the double digits, and they are expected to go further up.

Poultry plants reached full capacity utilization by Q4 2019 as well, and we will talk more about it later on in the presentation.

Lastly, is the infant nutrition segment. We reviewed the strategy for this segment in the light of our 5% market share and our focus on wholesale and export will be much more going forward. We will take a different look on our retail business. And following market will discuss that going forward in the presentation as well.

On the regulatory front, probably 3 or 4 major points to talk about. We have a new board, 4 of the 9 board members were reselected -- sorry, reappointed in August 2019, for the 3-year term. Majed Mazen Nofal as the CEO going forward from 1st of January. And most importantly, in December '19, we saw the announcement from the KSA government, about the change in the subsidy system going forward.

We are still waiting for finalization for some of the details. And as soon as they become available, we will go public with further details in that respect.

With that setting in context, I will talk about the next few sects, quickly. Slide 11, you will see the growth. The main -- major story remains that KSA remains the power hub in terms of the growth, 70% of the growth or, let's say, SAR 560 million of the growth is coming from KSA. This is followed by Egypt and Jordan, where about 20% of the -- on export, where about 70% of the growth came from and the GCC, as Majed talked earlier, remains very neat. The only exception was Kuwait, where the major growth driver was, in fact, the reentry of the poultry segment, which started in Q2 2019.

If I can go to the next slide, Slide #12. They're the same numbers, but the story, as you can see by quarter. And again, the message is, if you look at Q3 and Q4, you will see a huge uplift in KSA, and that is not just in dairy, it is in all categories. So KSA in Q3 and Q4 proved very resilient and rebounded massively. The GCC, as you can see throughout the -- all the 4 quarters has remained very neat. There wasn't a big growth, all the growth was driven by Kuwait's reentry into poultry starting from Q2, and you can see that clearly in the middle chart. The last one is export and IDJ, and which is a bit bumpy, but it's proving a lot of growth there as well.

If I can move on to Slide #13, which shows the same trend by product type, not by country. And you will see within by product type as well. The difference between the first half and second half is very obvious, as you can see on every single segment, the growth is double, if not tripled, in most of the segments.

The next 3 slides, when you talk of innovation, you're always asking us for innovation within our Investor Relations presentation as well. So with the 3 new slides going forward.

So this is Slide #14, 15 and 16. So you will see the major areas of growth where the growth is coming from.

Again, the first one is poultry followed by fresh dairy driven by the second half. Poultry has remained, for the last couple of years, the major growth driver for us, and we expect it to continue even further, as we will discuss later on.

Second slide, food service, this is by channel. We've been talking about entry into food services. You heard Georges talked about it at the Investor Relations Day as well and Majed and Georges talked further on that. But this is where you will see, [where meaning] half the growth -- meaning 46% of the growth this year is coming from food service channel. And this is not just poultry, it's dairy as well. And if you take up innovation, next page, you will see about 39 products that we launched this year. You can see new juice flavors, Long Life Juice, Super Juice. And in terms of Bakery and Diary, a long set of products are available as well.

If you can go to Slide 17. Again, it's an extension of food service. Food service for us is not a different way of delivery. We also have to modify our product chain as well. And there are just some examples you will see. And they are branded products that we are selling within the food service and export markets. And you can see the 10 kg Zabadi bucket, and this is a very successful product for us in the last year and this year as well, showing you how innovation is not just in retail market, but also in the food service market as well.

Lastly, none of this would be possible without the help of our people, which has been a great source of strength for us. And here, you can list a few of the examples of how we are trying to upward the training and the profile for our staff to take us even further on a successful journey.

With that said, I will turn over to Paul for the financial performance.

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Paul-Louis Gay, Almarai Company - CFO [7]

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Okay. So thank you, Ikram. Page 20, we have a summary of the financial performance for Q4 at the top of the chart and for fiscal year 2019 versus last year at the bottom of the chart. You can see a solid top line growth that we noticed in Q4 by 9.5%, which converts into a 5.9% for the year driven mainly by poultry, dairy and food service and bakery. Operating profit, unfortunately, slightly higher than last year, almost flat at 0.1%, that's reduced by 1.5% in EBIT terms for the portfolio. The main reason is mainly the increase in cost of imported alfalfa with persistent higher labor costs. The cost of reorganization of IPNC we've now

(technical difficulty)

[we can sell off to] as well as the cost of entry of the food service business.

Further down, the net income is showing a reduction of 15.9% year-on-year for the quarter and 10% for the year, and this is mainly due to adjustments in deferred tax we have to incur in Egypt and higher funding costs, mainly driven by the treatment of perpetual sukuk interest charge and a slower capitalization of interest linked to the slowdown in CapEx program.

If we move to Page 28 (sic) [Page 21], you can see the results by segment. As discussed earlier, all our product segments have shown strong performance mainly in the second half, however, one segment, Dairy & Juice category, the profit attributable to this segment is decreasing by 17.7% because this is a segment which has been the most affected by imported alfalfa cost, labor costs and the higher operational and deferred tax cost in Egypt has affected the dairy category profit mostly. Juice category has been also affected by the disruption we undergo in the category, we will explain that further. The bakery segment net income, on the contrary, increased by 22.5%, driven by strong revenue growth and we start to leverage the economy of scale of our available capacity.

Poultry segment has increased its profit by 34% -- 44.5%. Growth -- of course, top line growth accounts for that. The food service does account for that. And we have, of course -- that's supported by the very low mortality and better cost control. And in general, operating level is very high in poultry.

If we move now to Page 22, the net income by segment is declining, the loss of SAR 200 million year-on-year. And you see that the contribution is a negative contribution of dairy at SAR 300 million mostly, positive contribution of bakery and poultry. And the SAR 17 million impact, essentially due to the IPNC and one-off arable and horticulture charge.

Just want to point out on this slide that in percentage term, our Dairy & Juice business remain at a high level of 14%. Bakery is showing its position of 13.5%. And poultry is growing at 12.4%, which for poultry business is not bad.

Let's move now to Page 23, the CapEx. The downward trend of CapEx is expected to continue. You see we're going down from 4.4% to 1.6%, as we complete the construction of projects already in the pipeline. The inflow of new CapEx fees has dried substantially. New projects were only centered on poultry farming, manufacturing, both in KSA and Egypt and enhancement of distribution capabilities driven by the centralization of supply chain activities essentially.

The work in progress CapEx lease has reduced from SAR 3.3 billion in 2018 to SAR 1 billion this year. And it is expected to stabilize around the same level going forward.

If we move to Page 24, free cash flow. This has been, in my view, our highlight of the year. We have been through -- Almarai has been recorded a very strong cash flow performance for the year, doubling it from last year. The improvement of working capital is essentially measured due to the inventory improvement has sustained this strong cash flow generation. The continually declining capital expense, of course, is helping by SAR 300 million. As a result, the free cash flow is improving from SAR 1.2 billion last year to almost SAR 2.6 billion this year. Going forward, we expect this positive performance in free cash flow generation to continue as the reduction in CapEx will be coupled with a further improvement in operating cash flow, both from cooperation and from inventory reduction.

If we move now to Page 25. The leverage ratio net debt and EBITDA margin. You can see that the net debt has remained nearly the same over the year, however, the increase in equity is due to profit

(technical difficulty)

We are well below the target of 100% we have for long term. As far as net-debt-to-EBITDA, our ratio remained at 3.1, same level as last year. We are still on track, given the strong cash flow generation to aim for 2.5x to 2.75x net debt-to-EBITDA for the next 18 months, and we believe we will be able to achieve that. We noticed that the EBITDA percentage and EBIT percentage reduced from last year for the reason explained in the -- earlier in the presentation.

Page 26, debt maturity profile and debt profile. You can see that the sukuk program represents 33% of our gross debt. Banking still remains at 42%, the highest fund contributor, and government and semi-government distribution represents 25%.

The average debt tenure is 4.25 years. And you can see the yearly repayment schedule we are facing, SAR 2 billion for next year and so on.

If we move to the last slide, we see the performance of the share. Even though recently, the shares performed less stronger in the long-term period, you see that the annual compounded total shareholder return for investors is reaching 14% and we are over -- and over-performing the TASI stock and comparative stock.

I would like now to hand it to -- this is the end of this presentation. I would like Majed to make a small statement before we go to the Q&A.

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [8]

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Thank you, Paul. In a challenging trading environment, Almarai has delivered positive top line growth driven by poultry and fresh dairy. However, despite growth revival and strong cash flow generation, profits remain under pressure, the cause of which has been discussed earlier in the presentation.

However, wherein any major unforeseen event, we expect that the positive trend that we have picked up in 2019, will continue in the short term, with a forecast business strategy on top line growth driven by a channel expansion, a new product development and pricing rationalization. Coupled with an active cost control and higher free cash flow generation, we are expecting where we have to be taken in 2019 to bring positive impact during next year.

With this stronger financial position, Almarai can look forward for any growth opportunity either internal or external with high confidence.

I think we could open now for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question from Duaa AlFadda of Riyad Capital.

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Duaa AlFadda;Riyad Capital Company;Analyst, [2]

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I have 2 questions. The first question is regarding the inventory of alfalfa you have, is it still there or perhaps it's done? Or should we take the cost of the export alfalfa and for 2020? And another question, please, is regarding the expat fee, how much is it going to be in 2020? Or let's say -- let's talk about Saudization as well.

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [3]

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So I'll -- let me take them up Duaa, this is Majed. In term of our alfalfa inventory. In 2019, we haven't yet completed the transition from fully local to full overseas. And 2021, it's -- in 2020, we are expecting to reach. And then we would definitely be on full imported alfalfa by 2021. So this is the story of alfalfa. The inventory levels are still high. And we are working on reducing them because we still carry quite high level of stock even overseas.

In term of our expat levy cost, we are in line with the market. As you know that the highest trends will be reached at first of January 2020, and that would mean the peak of that charge will be end of 2020 year. And beyond that, it will normalize going forward because we do not expect that to grow any further according to the government-declared numbers.

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Duaa AlFadda;Riyad Capital Company;Analyst, [4]

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But Mr. Majed, we have seen that '19 compared to '18 salaries have increased by like SAR 200 million. So are you going to...

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [5]

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That's the payroll. The total payroll you mean?

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Duaa AlFadda;Riyad Capital Company;Analyst, [6]

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Yes, should we expect that the Saudization would increase to lower fees for next year? Or are you going to maintain the same level?

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [7]

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We are maintaining. Currently, our localization level is around 26%. And going forward, we plan to sustain it. So localization levels will be maintained. We have reached to 26%, and we will maintain, and expat levy will be at its peak by 2020. So if I would expect what would be the numbers -- growth rates going forward, it will be definitely lower than the numbers you have seen in the last 2, 3 years.

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Operator [8]

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We'll now take our next question from Hala AlFaris of SKFH.

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Hala AlFaris;Saudi Kuwaiti Finance House S.S.C.;Analyst, [9]

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I have 2 questions. First of all, is about the dairy business, especially the Long Life. You say there is a growth in the -- the revenues coming in the diary. I wanted to know, is this a volume-led growth? Or is this a price-led growth? One. My second question is about juices. We are seeing juices consistently disappoint results and contributing, I mean, negatively contributing to the overall sales. What is the company's strategy regarding juices? Are we planning to let go of this business? Is there a possibility of turning it around? Because the type of weakness that we had seen, juices that does not seem like an economic weakness, it seems more like a consumer preference weakness, which probably would be a trend that's already gone away. So how exactly is Almarai going to take this challenge up?

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [10]

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Thank you, Hala. Let me pick up the juice question, and then I will pass on the dairy question. In context of juice, please bear in mind that we are a player in a very big category, which has all the drinks that is basically around, including the likes of Suntop, Al Rabie, everything. We play in a very small part of it, which we call it normally the fresh or the chilled side of things, not the Long Life. So we were the elite, and we are continuing to be the elite of the juice category, and we still lead the fresh value juice segment. And yes, there has been a challenge to the category because we realized the last 2, 3 years that many of the consumers were adjusting to how they have a smaller wallets, and they have adjusted by rationalizing their juice consumption in general.

However, what we are seeing today of an opportunity for our juice under the new regulation of 50% additional price for sugar added product in Saudi Arabia and the UAE, this is an opportunity for us that we decided to reformulate our range to no added sugar in these markets. Launch our UHT Long Life juice with no added sugar into these markets as well. And opportunity for us is to turn around juice to being actually a major player in juice in total, either fresh or in UHT. So yes, I agree with your remarks that so far, juice has been demolishing value for the last 3 years in a row. I would probably feel more confident that 2020 juice curve in terms of EBIT contribution will have a turnaround. Ikram, dairy question is yours.

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Ikram Ulhaque, Almarai Company - Head of Finance [11]

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Sure. Thank you. So in terms of Long Life Dairy, when you look at the numbers of the 10% we've disclosed. Look, it's the combination of both pricing and volume. Pricing, in the sense that the discounting has definitely come down. It has come down to a level where we are comfortable with, I'm not so sure. I think it has still got a long way to come down. But the discounting in 2019 was definitely lower than it was in 2018. And you can see this in other company results as well.

But the volume growth is coming in the retail market as well as food services as well as export markets as well. We've been winning some key contracts in food service, which is helping us maintain the volume growth. And the pricing is getting a bit by bit better as well. The volume and pricing growth, I would say, is between 60 to 40 combination.

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Operator [12]

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We'll now take our next question from Saul Rans of Morgan Stanley.

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Saul Anderson Rans, Morgan Stanley, Research Division - Senior Research Analyst [13]

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A couple of questions for me, please. First of all, on your infant nutrition business, it looks as if the measures that you've been taking over the last year or 2, you hoped will kind of drive that business to profitability haven't had the effect or the full effect that you'd hoped. Can you just elaborate, please, on exactly what you're doing to realign and reorganize the business and why we should be confident that there's really a visible path to profitability for the infant nutrition business, please? If you could address that topic. And then secondly, maybe just a general question about the Saudi market, in particular, are you seeing any kind of turnaround in consumer trends maybe back away from value brands or value products towards more premium products at all, is that a trend that you're seeing, which clearly maybe is not present in the rest of the GCC?

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [14]

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Let me take up the infant question and Paul will take up the second part. In Infant, we have been -- as you know, we have the capability. We have a big asset that is capable of catering to a big part of the local demand. However, our commercial activity over the years could not really grow the market share beyond the 5% threshold, which did not actually -- it was too expensive to gain and too expensive to maintain, and it's not really a category that we felt we have a lot of leverage on from either distribution, route to market, retailers, it has proven after many revival attempts that to be difficult for us. So what we have decided to do is to restructure the business and to -- no commercial activity will be conducted by Almarai. We will still hold on to the asset. And we will be producing for any interested global brand. And we think that this is going to get more exciting with the news around elimination of subsidy, which has to be confirmed yet, but we are aware of elimination of subsidy on imports. So this would mean many of the big players in the market will be excited to get their product made here. Number two is all the neighboring markets that requires big part of the infant formula to actually produce for them, which we currently do as well. So -- and we are now a major player in the government sector as well because we have won the largest part of the infant formula of the government sector. So the asset is there. The business is there, but the brand is not anymore something with us. This does not mean that the business is going to be very profitable, but at least, we'll move into the black rather than the red, hopefully in 2020. Paul?

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Paul-Louis Gay, Almarai Company - CFO [15]

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Okay. And the -- around on that side, on the consumer behaviors, of course, we -- and we have said that consistently, we have seen a revival of consumers and consumption up. And this is linked with the general economy situation in the Kingdom, as you know, things are getting slightly better, generally speaking for the consumer in Saudi. Does it mean that we see consumers moving up in the consumers' behavior towards a more expensive, more sophisticated product, I don't think so. I think the consumers, unfortunately, after the crisis of 2016 have kept the habit of being very picky, very selective. The low days of large buy and large trip to the shops are over.

So like in many crisis, the consumers have changed their behaviors. Yes, they're coming back. They have more money to spend. But their purchasing pattern is very selective. And we don't see -- yes, indeed, they will look for more healthy products. Certainly, some niche product expenses. But globally speaking, no. Consumers in Saudi are not moving towards more expensive products.

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Operator [16]

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(Operator Instructions) We'll now take our next question from Adnan Farooq of Jadwa Investment.

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Adnan Farooq, Jadwa Investment Company, Research Division - Analyst [17]

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If you could just highlight the -- you mentioned in the result announcement that there were certain one-off items in the results in the fourth quarter. The announcement mentioned inventory adjustments for infant nutrition, write-off for horticulture assets abroad as well as certain items for Egypt, underused asset impairment as well as deferred tax adjustments. If you could just mention what is the -- if you could quantify these, that would be great. The second question is in terms of the subsidy regime change announced by the government. You recorded SAR 427 million in subsidies in 2019 according to your financials, what portion of these subsidies would be impacted by the changes announced by the government?

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Ikram Ulhaque, Almarai Company - Head of Finance [18]

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Okay. Adnan, let me take the first question and then I will pass it on Majed and Paul to go there. The first one about the one-off items. I'll go through one by one on the main items. So the first is infant nutrition. As we spoke earlier, we are focusing more on the wholesale export market, the government tenders. And as a result, the retail business is expected to take some adjustments. In that respect, the total impact will be close to around SAR 40 million to SAR 45 million for the quarter alone. So this was quite a major hit for the Q4. In terms of Egypt, there were 2 or 3 major issues. Paul talked about deferred tax as well as some hits we took on assets based within Egypt. The total amount there also came to around between SAR 45 million to SAR 50 million. In terms of horticulture, we reviewed our -- whatever is the remaining arable business that included our dates business. We have some other arable assets in neighboring countries, and that impacted about SAR 25 million for the quarter as well. There were a lot of one-off items demonstrated just for that, you realize the underlying trend does remain very strong. But these few items given the change in the business model for IPNC, the transition that's happening in Egypt, and as we are phasing out the arable business, these one-off items were necessary at the year-end to adjust for.

Regarding the subsidy regime, I will request Majed to ...

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [19]

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Yes. I think to highlight basically the effect of subsidy and the impact and the change. Up to the end of 2019, we were a beneficiary as the rest of the local producers among the segments of the stated or the previous subsidy mechanism. And the government has decided to redirect the subsidy instead of subsidy on enforced feed to subsidy on production. And we are aware that this is being finalized for the poultry segment, and we are aware of the proposal that the government will implement for the poultry. However, we are yet waiting for official communication on the poultry and potentially, what would be the dairy substitute for the subsidy, what do you call it, mechanics or scheme. So at the moment, we have not yet reached a conclusion, what would be the subsidy exposure on 2020. We are expecting probably in the next maybe 8 weeks that we will be able to know and quantify effects, and you will see it in one of our market announcements that will go out later on.

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Adnan Farooq, Jadwa Investment Company, Research Division - Analyst [20]

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Just one follow-up question. You mentioned in the announcement that the business strategy is on top line growth. And one of the -- one is channel expansion, new product development and cash -- price rationalization. Can you elaborate on the price rationalization plan that you have for 2020?

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [21]

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I think what we mean with that is the following, we will always have a pricing opportunity. And as you know today, for example, in the juice sector, we are going to sell below the sugar added price product, but it also will be a price that is higher than what we are selling for today. So we always have many pricing opportunities that are setting within our portfolio, which helps us into balancing out margins across different categories. So this is a card that we will always will play, will always be with us. And as you know, we have been facing substantial coast waves in the past. And we were able to maybe mitigate some of them via efficiencies, pass some of them as we did in the very last year, but this will always continue being on the table.

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Paul-Louis Gay, Almarai Company - CFO [22]

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The -- Do you mind if I may add on Majed, to say that pricing is a tool we will use of when and when we think it's appropriate.

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Operator [23]

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We'll now take our next question from Hamad AlNafisi of NBK Capital.

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Hamad AlNafisi;NBK Capital Asset Management Egypt;Analyst, [24]

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Just a quick question, please, from my end. So if you could just share the incremental increase in both expat levy and alfalfa cost in 2020 versus 2019, if possible?

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [25]

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Year-on-year.

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Ikram Ulhaque, Almarai Company - Head of Finance [26]

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For expat levy...

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [27]

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For expat levy, year-on-year is around SAR 50 million to SAR 60 million.

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Ikram Ulhaque, Almarai Company - Head of Finance [28]

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Correct. Look, the total impact for us in '19 versus '20 is expected to be between around SAR 60 million, given the level of expats that we are carrying and presuming a constant labor force.

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [29]

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Alfalfa.

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Ikram Ulhaque, Almarai Company - Head of Finance [30]

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Alfalfa impact, as we phase out, it will be around between SAR 70 million to, let's say, SAR 80 million, SAR 85 million on a yearly basis as we come to a normalized stage by the end of the year 2020. So what that means is 2021 will be the first normalized year.

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [31]

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Yes.

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Ikram Ulhaque, Almarai Company - Head of Finance [32]

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'20 -- you will see a cost growth in 2020 as well.

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Hamad AlNafisi;NBK Capital Asset Management Egypt;Analyst, [33]

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I see. So around SAR 120 million in both expat levy and alfalfa cost incremental over 2019 is expected to be paid in 2020 for these 2 costs. Is that correct?

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [34]

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Yes, yes.

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Paul-Louis Gay, Almarai Company - CFO [35]

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This is a good question. This tells you a very significant cost increase when (inaudible) should be -- when you look at our performance, we are offsetting and we're trying to offset these kind of big numbers.

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Operator [36]

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We'll now take our next question from Mohammed Al-Hadhrami of FALCOM Financial Services.

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Mohammed Al-Hadhrami;FALCOM Financial Services;Analyst, [37]

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Just have a question about the food service segment that you started. You mentioned that there is a cost entry, if you can please elaborate about this, how much it was? And what is expected going forward? And you said there is one-off expense. And whether this business is making profit this year or not?

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Ikram Ulhaque, Almarai Company - Head of Finance [38]

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I'll take part of the question, and we can extend on that further on. When you talk of one-off, and I'll talk more from an accounting point of view. We talked about revenue growth, and you saw 46% of the revenue growth coming from food service channel. As we enter into this segment, we automatically enter into a more riskier asset of, I would say, the -- from a receivable point of view, a more riskier asset base. And this is why you will see a charge on the P&L for the current year. It's a one-off charge. And after discussion with our auditors, given the inherent risk and IFRS 9 and 15, our view of -- that we have to take a one-off charge, which reflects the different nature of this segment and this channel. This is from a financial and accounting point of view, and that's the one-off charge that we talked about.

In terms of utilizing the benefit of this channel. This is about capacity utilization and perhaps Paul you would like to...

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Paul-Louis Gay, Almarai Company - CFO [39]

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Yes. I mean they -- and we cannot be as transparent, but you can imagine entering a new channel, a new segment will incur -- we will incur setup costs. We have acquired a company called Premier Foods. We have costs associated with the integration. We have integrated this business in the space of a few months, something [first] I'd add to let go. We have to incur costs in that respect. We have to do also cleaning somehow the balance sheet we purchase. So we cannot go in this phone call in too much detail, but entering a new segment, a new channel is not free of charge. To reassure you is this channel profitable? Yes. Is it as profitable as our core businesses? Not yet. But we're aiming to get it higher because the top line growth is very strong. And this year, we have the full capacity that we have available for this business.

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Mohammed Al-Hadhrami;FALCOM Financial Services;Analyst, [40]

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Okay. If you can, just to understand, what is the difference between this food services business, and like modern trends, in terms, like -- the business dynamic in terms, like -- we saw the competition, how -- what is the difference? If you can elaborate.

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [41]

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Mohammed, let me try to highlight the key differences between the food service and the retail. First, in retail, you leverage Almarai as a brand or our other brand portfolio. In food service, it's less critical for a customer because they basically use it as an ingredient. So this is where you have a stronger competition, a lower price point that you retail. Yes, it's close to no brand support and no activity and no discounts, but you build those into your selling price. The advantage for Almarai today is after a big investment cycle, we do have plenty of capacity across majority of our category. So we are pricing this at a level where it is accredited in value, it's bringing positive contribution. However, it's not as the same level of our retail today. So this is where the big differences are. So we are expecting that we will leverage this channel, and we will grow it. However, we would like to highlight that it won't be contributing the same margin level that our traditional categories are delivering today.

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Mohammed Al-Hadhrami;FALCOM Financial Services;Analyst, [42]

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Okay, fair. Does this business require any CapEx requirement?

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [43]

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Not really. It's not really CapEx. It's existing capacities, maybe future acquisitions and maybe both in food, something that you basically buy from others in order to enhance the portfolio. So investment behind food service is mainly route to market and developing of category.

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Operator [44]

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We'll now take our next question from Taher Safieddine of Citi.

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Taher Safieddine, Citigroup Inc, Research Division - VP [45]

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It's Taher from Citi. Couple of questions, if I may. The first one is on the poultry segment. I mean given -- sorry, I might missed it because I dialed in a bit late, but given that you're at peak utilization, I just want to get your understanding of how we want to drive the top line growth for the business? I mean assuming it's going to be purely price driven, and you are expanding in the food service segment, which continues to be more competitive on pricing, and the news that BRF, which is the poultry giant, is actually establishing a plant in Saudi Arabia, so I just want to get your heads around the strategy for the next 2 years.

My second question is on the fresh dairy. Can we just get some color in terms of market share dynamics after the price increase, given that none of the other players so far have followed through with the price increase? So I just want to understand how -- where is the market share today after you've lost couple of -- 100 -- I think, 300 basis points straight after the price increase in July? So that's my second question.

And just final one on margin profile. Should we expect the same picture to continue next year? I mean strong top line growth, but then most of this growth gets eroded at the operating profit level, given the cost inflation that you're seeing from expat levies, from change in subsidies, from the alfalfa competition and may be limited ability to increased product prices. So I just want to get your view on that.

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [46]

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Right. Let me begin Taher by responding to your question on poultry. Just to highlight, in 2018, we did total volume of 157 million birds. We brought it up to nearly 190 million, and we are planning, going forward, to maintain 200-plus million.

So it's a shy volume growth for the short term, but we have grown our capacity on farming to be around 230 million. This is with us today, it does not require any further CapEx.

And one of the major investments that we are undergoing in 2020 is adding 40 million to 50 million bird capacity on site, which means we will be able to grow the poultry to around 240 million birds in a year.

So we are taking the necessary steps to grow capacity in either poultry farming or poultry processing.

Then the second growth pillar, which is quite key is managing the mix between food service and retail. So this is also a key component because we would like to maximize retail, minimize food service, and if not, we would like to basically leverage the full utilization of the plant. And this will continue a lever that we will use going forward.

In relation to the entry of our friends, the BRF, they are entering in a category, which basically, we don't really operate in today, which is the value, what do you call it, value-added products, which is basically burgers or frozen shish tawook so maybe food service items, et cetera. And this is quite good. We do not see it as an immediate threat to our poultry or fresh raw poultry business that we operate in. So in a way, it does not really bring us a lot of concern. It's similar to the facilities that they currently operate in Abu Dhabi, which is basically something else you could find the product in retail in the freezers, which we don't really operate in.

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Ikram Ulhaque, Almarai Company - Head of Finance [47]

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Taher, your second question about the competitive dynamic in it, like what's happening in the competition in the KSA Fresh Dairy, was that your major question on -- #2?

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Taher Safieddine, Citigroup Inc, Research Division - VP [48]

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Yes, yes, exactly.

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Ikram Ulhaque, Almarai Company - Head of Finance [49]

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Yes. So what happened after the price increase, we saw about a 2 or 3 percentage point decline into our market share. And ever since that from August 2018 till November 2019, the market share has remained static. We saw a drop for the first month and that was it. And we've been observing and observing a lot of things that come in and out, but there hasn't been any change. Within the #2 and #3 player, we're -- and I'm quoting AC Nielsen data, not our internal data, we think, now they've gain a couple of points, but that's about it. At the top of the chain of the market share, we have -- we can presume that the market's data consumed remained pretty much the same for the last 18 months as we speak right now.

And the third question, Paul...

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Paul-Louis Gay, Almarai Company - CFO [50]

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Okay. So on the profitability front, indeed, if you look at the presentation I've sent, we've seen an erosion of EBITDA from 29.7% to 28% and EBIT from 18.6% to 17.2%. Of course, this is challenging, and we had explained why this is happening.

The efforts of the management is to go back and to answer your question, what do we see in 2020, I don't give any significant direction, but precise forecast. But of course, we are engaging and we have already engaged into significant restructuring in our support function, in our sales support function, in our overall organization, and we are working very hard to gain and offset the cost we talked about.

So on the one hand, cost will be increased. We expect that costs will decrease on the other hand with an objective to recruit and will come approximately to the level of 2017. So that's the target we have. Are we going to be able to achieve it? I don't know. Future will tell, but we have in placed program to achieve that. We have -- we are struggling ourselves, we'd take outside help as well to do that. We have proven in the past that we are able to be reactive to market situation.

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Taher Safieddine, Citigroup Inc, Research Division - VP [51]

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Yes, no doubt. Just a follow-up question on just the juice category. I know maybe it's still too early to call what's happening in the market after the sugar tax. But I mean, just looking at, I don't know the numbers year-to-date in general, I mean, has there been a huge disruption to the volumes in the juice category after this tax? And from our understanding from previous calls that you're one of the most penetrated players on the fresh or the non-sugar within your portfolio versus your peers, which potentially are going to be impacted much more with this tax. Does this mean that you're going to be more competitive in terms of pricing, given that the others are going to be forced to fully absorb the tax? I just want to get some color there. Sorry, if you've mentioned this before, maybe I missed it.

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [52]

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Any -- No, no, it's -- that's all right, Taher. I think the answer to your question is, yes. We are expecting to be better positioned going forward. We have 11 flavors that are with no added sugars today on the shelf of Saudi and UAE. We are positioned at a lower price than all the competitors with added sugar.

So we think 2020 is going to be a turnaround year for our juice business, and we will actually win versus competition, including Long Life with our launch of no added sugar even in the Long Life range. So we are playing that. Hopefully, our dance will result in a good result. And we will see at 2020 to prove that what we did is the right thing.

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Paul-Louis Gay, Almarai Company - CFO [53]

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Okay. We'd like -- Okay. Can we take 1 or 2 last questions? We're reaching the end of the call here.

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Operator [54]

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We'll now take our next question of Meera Reddy of SICO Bank.

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Meera Reddy, Securities & Investment Company BSC, Research Division - Research Analyst [55]

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This is Meera Reddy from SICO Bank. I just have 2 questions in mind. First one is on the poultry segment, considering that you're expanding capacity by 40 million to 50 million birds in 2020, what can we expect the run rates on volume for 2020? And my second question is on the food service channel. Can you give us some numbers regarding this? Just margins versus the retail segment, how it is currently and how it -- we can expect going forward? And also, in terms of -- you also mentioned in your PPT that you were providing for higher debt exposure in the food service channel. But could you just elaborate a little more on this, please?

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [56]

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Take the food service, I'll take the poultry.

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Ikram Ulhaque, Almarai Company - Head of Finance [57]

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Okay. Regarding the food service debt position, it's the future economic losses or the future debt recoveries on this segment. But we haven't built enough credit history to justify a much lower bad debt provision. This is why the one-off charges were built in the balance sheet.

As we develop more history, as we see more and more debt recovery, currently, the debt recovery days are longer than our traditional retail channel because of our brand strength, as we talked earlier. But as we're getting more stronger in this channel, we are comfortable that we'll be able to ensure that our history becomes better and better in this channel.

Regarding poultry [on birds, Majed.]

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [58]

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I think best to highlight, we are investing, that this capacity won't be available for us till pre-Ramadan of next year. So it's not going to influence on the short-term 2020. The impact will come, hopefully, for 2021.

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Ikram Ulhaque, Almarai Company - Head of Finance [59]

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And as we said, this -- like we saw 190 million birds, Meera, we're talking about the run rate. We were touching 4 million birds per week in Q4 alone. And one thing we should keep in mind, we will have an annualization impact coming through in 2020. So regardless of the capacity coming on board, we will have a positive volume impact.

On top of it, we'll have a positive pricing impact as we go towards our margin selection and going towards more channel selection, where we can get more value for our birds. And this is why the revenue growth for the next year for poultry remains as strong as it was at the beginning of 2019.

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Meera Reddy, Securities & Investment Company BSC, Research Division - Research Analyst [60]

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Okay. Perfect. I just have one last question. Sorry, it was just on the juice segment, since you mentioned that you're going to have lower pricing than competitors, is this going to take a hit on margins?

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Majed Mazen Rasheed Nofal, Almarai Company - CEO [61]

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No. Actually, we are expecting that our EBIT on juice will actually grow. And yes, our juice has cost us more, but we are able to charge them for more.

And we are still positioned better than competition. And as I said, we still need to evaluate and assess how much we will be able to get out of the Long Life juice business that is traditionally based on sugar to non-added sugar range that we have offered. We don't know that yet, but we are very optimistic that we would have a winning case in Long Life juice as well, which we have not in the past.

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Paul-Louis Gay, Almarai Company - CFO [62]

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I think there is a wrong perception on juice because we're affecting in the market and top line. But in terms of financial return and results, it is a very strong contributor to the top line. So we are dedicated to juice. We are committed, and we believe that at the end of the day, we're going to come stronger than before.

Can we take a last one question, operator?

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Operator [63]

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Absolutely. We'll now take our last question from Adnan Farooq of Jadwa Investment.

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Adnan Farooq, Jadwa Investment Company, Research Division - Analyst [64]

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Just a follow-up question, Ikram. The one-off charge related to bad debt of SAR 55 million, this is on top of the one-offs that we discussed before. Is this understanding correct?

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Ikram Ulhaque, Almarai Company - Head of Finance [65]

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So the SAR 55 million a month, the reason, if you look at the face of the P&L, you will see the hit, which is about SAR 28 million versus the gain of SAR 25 million last year. So the delta (inaudible)

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Adnan Farooq, Jadwa Investment Company, Research Division - Analyst [66]

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Okay. So -- but the actual charge is SAR 8 million?

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Ikram Ulhaque, Almarai Company - Head of Finance [67]

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Correct, correct, correct. So this is same [pricing] -- yes.

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Adnan Farooq, Jadwa Investment Company, Research Division - Analyst [68]

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And one last thing. In the past 6, 7 quarters, you have been taking a charge because of loss on biological assets. I understand you have been selling the main cow -- male cows that [involves] every quarter. This quarter, that short charge does not seem to be there. Should we expect, like, similar charges going forward? Or the market has stabilized, and these charges should be lower in 2020 as well?

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Ikram Ulhaque, Almarai Company - Head of Finance [69]

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Adnan, our losses has been around SAR 150 million to SAR 160 million for the last couple of years. I think this year, we are around SAR 120 million or SAR 130 million, something around that this year. And part of it, this market is getting a bit better. The herd is getting more rationalized. We are not increasing our milking capacity. So the herd is automatically rationalized. But in the current level, which you were saying, between SAR 120 million to SAR 130 million, I would expect that to continue in the future. And hopefully, they become even better. But we're not expecting any further deterioration as we speak.

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Paul-Louis Gay, Almarai Company - CFO [70]

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Okay. Operator, I think at this stage, we'd like to close the call. I would like to thank all of you for your interest and your questions. And we are looking forward to present to you the Q1 results 2020, hopefully, going forward, with the better numbers and the stronger figures. But thank you very much for the interest.

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Operator [71]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.