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Edited Transcript of 2280.RI earnings conference call or presentation 8-Oct-19 1:00pm GMT

Q3 2019 Almarai Company SJSC Earnings Call

Oct 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Almarai Company SJSC earnings conference call or presentation Tuesday, October 8, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Georges P. Schorderet

Almarai Company - CEO

* Ikram Ulhaque

Almarai Company - Head of Finance

* Majed Mazen Rasheed Nofal

Almarai Company - Deputy CEO

* Paul-Louis Gay

Almarai Company - CFO

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Conference Call Participants

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* Abdulmalik Majed Al Salem

Al Rajhi Capital Company, Research Division - Analyst

* Adnan Farooq

Jadwa Investment Company, Research Division - Analyst

* Hamad Albarrak;NCB Capital;Analyst

* Harry Whelpton;Vergent Asset Management;Analyst

* Marc Hammoud

JP Morgan Chase & Co, Research Division - Analyst

* Meera Reddy;SICO Bank;Analyst

* Nada Amin

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

* Samir Murad;NBK Capital;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, everyone, and welcome to the Almarai Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Nada Amin. Please go ahead.

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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, Anit. Hello, everyone. This is Nada Amin from EFG's consumer and healthcare team. It's our pleasure today to be hosting Almarai's Q3 results call. The -- from the company's management today, we have Mr. Georges Schorderet, the company's CEO; Mr. Majed Nofal, the company's Deputy CEO; Mr. Paul Gay, the company's CFO; and Mr. Ikram Ulhaque, the company's Head of Finance.

So we'll begin with a brief presentation, and then we'll open the floor to Q&A. Paul, please go ahead.

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

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Nada, thank you very much. Good afternoon and good morning to all of you. I've assumed that you have downloaded the 2019 Q3 earnings presentation from our website. And for those of you who have not been able to do so, please go to the website, Corporate, Investors, Earning Presentation, and you will find the documents. In the meantime, I would like to hand over to Georges, who will make a short opening statement.

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Georges P. Schorderet, Almarai Company - CEO [4]

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So ladies and gentlemen, good afternoon. My name is Georges Schorderet, I'm the old and the new CEO of Almarai.

Let me go back to our management changes, which took place earlier this year. I handed over early April 2019 to my successor, who came from outside of the company. It didn't work, as we decided to reverse for personal reasons after 3 months. So since of the 7th of July, I am back in the driving seat.

As you know, a CEO change, especially when it comes from outside, it's can be risky. As part of our risk mitigation plan, the Board of Directors has activated the plan b. I was -- it was for me a very short retirement, I can tell you that. And as you can imagine, after working for 15 years for this great company, I could not let Almarai down, and therefore, I accepted the challenge to come back.

I have today the privilege to have the Deputy, Majed Nofal, who has been appointed Deputy CEO with the objective of taking over as the CEO within the next 12 months. Majed has been with Almarai for the last 12 years in various roles, CFO of Western Bakery, CEO of Western Bakery, Head of Central Procurement, VP in New Businesses, before being prepared to take over from Paul, as the new CFO. Majed, after having worked for nearly 1 year at side of Paul, as a CFO, is ready to lead this company for the future.

I would like, at this stage, to also say thank you to Paul Gay, who didn't even have the time to retire. Paul has accepted to come back as the CFO. And as you can understand, we are working at identifying his successor. Once again, I would like to reinforce this point, this company is not relying on one guy. We have a strong management team, committed, dedicated and passionate in making Almarai an even greater company.

So before addressing Almarai's financial performance, if you go to Page 4, let me start by addressing the general market trends, followed by Almarai's response to these market forces. Market, in general, started Q3 on a positive note and to -- this trend continue throughout the Q3 across all categories. We see strong exit rates in Q3 as a sign of continual improvement in the market, and we expect Q4 to continue this positive momentum. There were only a few exceptions like Fresh Juice segment where year-on-year decline continued. However, since June, rate have improved considerably, which we will discuss later.

So only other exception was decline in Bahrain. This is mainly due to the introduction of the VAT at the beginning of this year. Core categories, mainly Dairy, Bakery and Food, delivered very strong growth in the Q3, following a poor Q3 last year forced Dairy price increase. This strong growth is further assisting in managing an industry-wide milk excess, lower discounting, in general, mainly in the Long Life category. Poultry continued its strong growth for the year, although growth rates lowered slightly during Q3 due to timing differences related to Poultry farming, additional production capacity coming on time -- online.

Continuous cost pressure on feed, high manufacturing and trade spend and expat levy adjustments has resulted in lower EBIT, compared to last year. In addition due to accounting treatment of perpetual sukuk and general high interest rates year-on-year, resulting in high funding costs, however, we expect this below the operating profit trends to reverse next quarter due to free cash flow generation on like-on-like from provision in perpetual sukuk was paid off in September 2018.

Lastly, as discussed during the Q -- earnings call, other than cost focus, Almarai will continue to drive cost leadership across all product category and focus on free cash flow generation by managing working capital and CapEx in the short-to-medium term.

If you go to Slide 5, as discussed earlier, we have seen positive trend in the market for the last few months, and it's getting confirmed during the last few quarters by change in the total market cost trends. So you can see this minus 8.6% in February '18 turned to a plus 3.8% in June '19. However, this positive trend rebound remained mainly centered on KSA and general weakness in the other GCC countries have unfortunately continued. Further, Egyptian market is getting stable, whilst they are not yet a pre-devaluation level. The expected cost in the top line is returning.

If you go to the next slide on Page 6, with this background of market turnaround, Almarai is positioned to gain the most of the -- this turnaround. Almarai retains its #1 and #2 position in all of its categories and has continued to gain share in most of the categories as well. Our competitive advantage is clearly shown in the sales column where we retained the leadership position in all our trading markets except UHT milk and Poultry.

I will now pass on to my Deputy, Majed Nofal, to discuss the company performance within this macro environmental context.

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

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Thank you, Georges. Good afternoon. And I had the privilege of connecting with some of you earlier, and hopefully, we will get more time in the future.

Going back to our presentation, I think, it's worthy to mention that in our key market, Saudi Arabia, which is significant in our revenue contribution, in quarter 3, we are back to growth at 5% year-on-year. We could see that GCC has remained challenging for us, but the new territories of Egypt and Jordan are above-indexing when it comes to year-on-year growth rates in quarter 3.

Coming back to the categories, as discussed earlier, the chart above will highlight the turnaround in Q3 against the run rate in the first half. In all of the categories, as you could see, the growth has returned considerably. Even in Juice category, where, whilst the growth remained negative, however, it has been stabilizing compared to a double-digit decline in the first half of '19. In term of our innovation, our innovation pipeline continue in Q3. And on year-to-date basis, we have launched new products, some of which are shown in the pictures above.

I will pass on to Paul, now to take us through the financial performance section.

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Paul-Louis Gay, Almarai Company - CFO [6]

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Okay. Thank you, Majed. If you go to Page -- Slide 12, you will see from this slide the solid top line growth of Q3 of 7.7% and which is driven mainly by Poultry product category followed by Food, Dairy and Bakery. However, you can see from this slide, the operating profit is down by 1.5%, as compared to last year in Q3 and lowered by 2.4% on a year-to-date basis. The main reason of the EBIT reduction, related to revenue growth, is mainly due to cost of imported alfalfa, higher labor costs and higher marketing investments.

Lastly, as you can see as well, the net income is showing a minus 8.5% reduction year-on-year for Q3 and minus 8.6% year-to-date. This is mainly due to higher funding cost driven on one hand by accounting treatment of the perpetual sukuk, but also by a general average funding rate increase.

Moving to Page 13, you see the results by segment. As you can see, all of our product segments are showing strong performance, mainly in Q3, even Dairy & Juice segment, despite a weak Juice segment, grew 2.1% year-on-year. However, on operating profit margin by segment, the results are different by category. The Dairy & Juice category, the profit attributable to shareholders decreased by 11.1% mainly due to higher funding costs, adverse market condition in the Juice category, higher alfalfa cost, coupled with discounting and promotion activities, especially in Long Life Milk.

The Bakery segment net income increased by 4.1% mainly because of the strong revenue growth. The bottom line was slightly impacted by additional investments in marketing and branding activities. The Poultry segment net income increased by 28.6% based on volume growth of 15.8%. The top line growth was supported by HORECA segment, which now represents around 50% of the total volume for the category and significant profit growth was aided by consistent lower volatility and the better cost control.

Moving to Page 14. And you can see here the CapEx and free cash flow developments. I'm pleased to confirm that the downward trend of CapEx trend is expected to continue as we finalize the construction of projects, which are already in the pipeline. The inflow of new CapExs approval has dried up substantially, however, the existing projects in the pipeline are still attracting some investments. These projects were centered mainly on Poultry farming, manufacturing in both KSA and Egypt and some enhancement of our distribution capabilities driven by centralization of a few supply chain activities.

With regard to cash flow at the bottom of the chart, the normalized operating cash flow is still running at around SAR 4.7 billion, however, this has been impacted by nearly SAR 0.3 billion of additional working capital investment during the last 12 months, mainly because of the alfalfa stock situation. We expect to unlock these additional investments over the coming 12 months and expect the OCF number to come back to a normal level between SAR 4.7 billion to SAR 5 billion. CapEx, as mentioned earlier, will continue a downward trend towards SAR 2 billion by 2020. These results will put Almarai on track to more than double its free cash flow generation in 2019 compared to 2018.

If we move to the leverage Page 15, we'll see that the net debt-to-equity ratio stand at 83.2% at the end of Q3 2019 and remain within our target of debt-to-equity ratio of being lower than 100%. The net-debt-to-EBITDA ratio remain at 3.3x at the end of the quarter. However, our objective, as you all know, is to achieve an objective of around 2.5 to 2.75x net debt to EBITDA in the next 2 years, and this will happen by an improvement in free cash flow generation.

The last slide is about, Page 16, the key share data. And you see the performance of the share, despite a challenging year lately, we still have performed steadily on the long-term period. And the return -- total net shareholder return reached -- has reached 14.1% since IPO.

I would like to close the presentation and to open the discussion and Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) At this time, we do have a few people in queue. We'll hear first from Meera Reddy from SICO Bank.

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Meera Reddy;SICO Bank;Analyst, [2]

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Congratulations on the results. I have 2 questions. One is regarding the expat levy exemption. Is Almarai benefiting from this 5-year exemption? And if yes, what operations and to what extent is covered by the government? And the second question is with regards to your Juice portfolio, has Almarai already started distributing the new no-added sugar juices? Is this -- and how is this going to benefit you?

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Georges P. Schorderet, Almarai Company - CEO [3]

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Let me take the first one. In term of the exemption for the industrial segment by the ministry of the expat levy, currently what we understand is there is certain part of the organization, which is qualifying, and it's approximately around 4,000-plus in terms of headcount, which translates into annually around SAR 40 million of expat levy exemption. But it's worth mentioning that this is applicable on 1st of November, and we still need to be exposed to the last increase of the expat levy for 2020 on the rest of the workforce. In term of the Juice, second question, Ikram will...

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Ikram Ulhaque, Almarai Company - Head of Finance [4]

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On the Juice, currently, I'll say, about 15% to 20% of our portfolio is having no sugar and that is continuing. In terms of getting ready for the tax on the first of December, the production lines, we are ready for it, but currently none of the juices are having the revised formula, as we speak. We are -- we remain on track, and we remain confident that by the time the tax comes -- enforced on 1 of December, we -- all of our formulas would have changed to ensure that we pay no tax on this one.

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Meera Reddy;SICO Bank;Analyst, [5]

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Okay. Sure. But with regard to the Juice, how has the response been for the new formula?

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

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No. We haven't -- so what we have done a lot of consumer testing to make sure that once we launched a new formula, the consumer does not feel any difference, but we are still -- but we haven't launched it in the market yet. We've done a lot of individual customer testing, but it's not out there in the market yet.

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Meera Reddy;SICO Bank;Analyst, [7]

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And how does it look?

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Ikram Ulhaque, Almarai Company - Head of Finance [8]

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The -- our -- from our readings, it tastes and feels the same, but of course, the real test will be the consumer when the formula goes live in the last month of Q4. So we will be able to give you a more detailed update when we finish the year in the Q4 earnings presentations.

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Operator [9]

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(Operator Instructions) We will hear next from Taher Safieddine from Citi.

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Taher Safieddine, Citigroup Inc, Research Division - VP [10]

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Two questions from my side. First one is on the Poultry segment. I mean, very strong performance. Can we just get some numbers in terms of the run rates on volumes that you're currently at? And then taking a 1-year view on the Poultry business, I mean, how long do you think this volume-driven growth can continue into 2020? And then what's, I mean, the strategy ideally would be, maybe, more price-driven? So if you can just give us some insights on how you look at the retail versus the HORECA channel, which is -- which has been the key focus and the growth driver recently. That's my first question. And my second question is on the alfalfa. Can we get a color on how much of an additional costs this will have in FY '20? And when should we look at more normalization of the cost base for the alfalfa? Is it going to be FY 2021 as a base?

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

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So I'll try to give it an intent on the first and second. So number one, we currently remain on track. Our run rate is about 175 million to 180 million birds for the current year. Last year, we did about 155 million birds. So the growth in volume remains very strong. An exact number will be known at the end of the year, but we remain on track for about 175 million to 180 million birds.

Regarding the HORECA, the split remains pretty much exactly in the middle. Even in Q3, we are selling about 50% of our volume in HORECA. The balance is going into the retail channel. And as Georges talked about, the additional capacity, we are working in the background to deblock the farming and manufacturing to see if we can do between 180 million to 200 million birds in the next 1 or 2 years. But the main growth will come from annualization of the volume impact in 2020 of the birds. Plus of course, the growth we will have in retail will drive the average pricing up for this channel. So they are the 2 major areas of growth of the top line for Poultry business for 2020.

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Taher Safieddine, Citigroup Inc, Research Division - VP [12]

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And just quickly on the margin...

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Paul-Louis Gay, Almarai Company - CFO [13]

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I just want to comment on -- yes, so I was about to say, in parallel to the volume dynamic that Ikram described, we are seeing a lot of efficiency in the supply of birds. Not only the mortality level remain low, but across the supply chain, since now we are reaching almost optimizing capacity, we see a lot of good news on the margin front. So yes, we have a dilutive effect of the HORECA volume, but somehow offset by performance and efficiency in supply chain, if it was -- that's your question?

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Taher Safieddine, Citigroup Inc, Research Division - VP [14]

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Yes. I mean just on -- my question is...

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

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Yes?

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Taher Safieddine, Citigroup Inc, Research Division - VP [16]

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So just in terms of the cost base, I'm guessing, I mean, there's, what, 60%, 70% of the cost base in Poultry is fixed, so economies of scale should be filtering through as you increase and you approach this optimal volume or production? Is this a sound judgment?

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Ikram Ulhaque, Almarai Company - Head of Finance [17]

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I think the fixed and variable will change depending on how much volume we do and what day of the year. It's a good concept, but in terms of totality, it changes. If you look at the presentation and look at Page 13, you will see the Poultry is growing by 15%, but the profit is growing at 28.6%. Our net income level is now reaching 12.2%. EBIT levels are crossing 13% to 14% on a year-to-date basis already. And we're fairly comfortable as the year passes by, it will get stronger and stronger, giving exactly -- because our costs are remaining fixed, and we continue to maximize every single riyal from the birds. And that's how the whole thing (inaudible).

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Georges P. Schorderet, Almarai Company - CEO [18]

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But in term of coming back to alfalfa question, Taher, I think, basically, the journey of alfalfa for Almarai has begun long time back, before even it began for the industry. And we have to gear our overseas operation to supply 100% of our requirement subsequent to the ban on local production. In term of our phasing out, phasing in between the stocks, as you said, we are still halfway through. 2020 will carry some of that effect. 2021 will carry the last of it. I think 2022, we will be completely reliant on imported alfalfa. So we have still 2 years ahead of us till we somehow reach to the peak of the cost in term of imported alfalfa.

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Taher Safieddine, Citigroup Inc, Research Division - VP [19]

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And in terms of -- just in terms of annual, I mean, cost escalations from these, is the SAR 50 million to SAR 70 million number is still there for 2020 at least?

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Georges P. Schorderet, Almarai Company - CEO [20]

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Yes.

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Taher Safieddine, Citigroup Inc, Research Division - VP [21]

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Adjusted cost from this -- okay.

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Georges P. Schorderet, Almarai Company - CEO [22]

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Yes. The number is around that.

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Operator [23]

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We'll hear next from Marc Hammoud from JPMorgan.

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Marc Hammoud, JP Morgan Chase & Co, Research Division - Analyst [24]

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One question mainly on the revenue line. It's impressive revenue performance in Q3 versus the H1. So can you shed some light on what was the driver in Q3, segment-by-segment, between volumes and prices? And your strategy to -- your value strategy in some of these segments. I heard you, Paul, saying that there was promotions and discounting in Long Life Milk. And I'm wondering what basically shored up the revenue performance to double digit in that segment, in particular. But we can address segment-by-segment, if you don't mind, please.

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Ikram Ulhaque, Almarai Company - Head of Finance [25]

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So Marc, I'll -- if you look at the Q3 only -- let me explain the first half. There's a huge price impact coming through in the first half, because we changed the Dairy pricing on the first of July 2018. If you look at year-to-date and the volume in Saudi is going above 5%, 2% is because of price, 3% is because of volume. But if you look at Q3, virtually, all of it, every single part of it, I would say, probably, 90% of it is volume linked, because we are reaching a perfect comparison. Only 1 day of the quarter we had a price variance. So of the other 90 days or 89 days, there was a like-for-like pricing. So -- and the same continued all the way through, except for Poultry. Poultry does get impacted, because of our sales into HORECA and how the growth impacted. Otherwise, all the revenue growth is -- so Q3 pricing is all led by -- the growth is all led by pricing in Saudi.

In terms of GCC, it's also all volume-led. And in terms of export in another countries, it's other way around. It's 80% pricing, 20% volume, mainly driven by the price increase in Egypt. And to complement that in terms of discounting, the discounting level has started to come down in Q3, compared to Q3 last year. The impact of -- and this is mainly in the Long Life Dairy sector, but Long Life is about 10% of our total revenue. So the total impact of discount on the whole revenue growth was fairly limited. It'll be less than 0.2% or 0.1%, and that's why I've overlooked that.

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Marc Hammoud, JP Morgan Chase & Co, Research Division - Analyst [26]

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So if 90% of this growth is coming from volumes in Saudi, if I understood well, what has changed to drive this volume growth? Is it -- in a sense, is it market share gains? Is it competition also joining Almarai in this value strategy, so lowering the discounts? Is it actual demand, which is increasing, I mean...

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Ikram Ulhaque, Almarai Company - Head of Finance [27]

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I would say, if you can go to Slide #6, which is the market share growth rates, I think, it's the rebasing effect. Is everybody in Saudi consuming 8% more juice or more dairy, I would say, no. They don't suddenly come and the whole habit change. But we have a rebasing effect in Q3 2018 last year. So the growth for our Almarai looks very strong. But in terms of market growth, and as Georges talked about, if you go to Slide 5, you can see the market has been turning around. The markets are turning by, maybe, 2% to 3%, and the balance is us gaining market share, because of our competition.

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Georges P. Schorderet, Almarai Company - CEO [28]

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Yes. It's mostly rebasing effect, and to some extent, UHT, in particular, slightly gained -- regained the market share, slight regain of market share.

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Operator [29]

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We'll hear next from Abdulmalik Al Salem from Al Rajhi Capital.

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Abdulmalik Majed Al Salem, Al Rajhi Capital Company, Research Division - Analyst [30]

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First of all, congratulations for your good results. I have 2 questions. So one question -- first question is about the -- other than GCC and KSA, as part of revenue, the geographical revenue, I've seen it -- it has grown by 18%. I understand that 11% was from Jordan and 7% of -- 7% was from Jordan and 11% of Egypt. Was it based on quantities or most of it was value, as in terms of currency appreciation? And the second question is about -- is there any new market, which was introduced to Almarai portfolio or was it just the same old markets? And the second question is about the -- also the CapEx. This -- in the last 12 months, it's reached to SAR 1.9 billion. And as I understand, you have some remaining projects in your pipeline. So in 2020 and 2021, how much do you forecast that -- which will be your CapEx expenditures?

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Paul-Louis Gay, Almarai Company - CFO [31]

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Okay. Let me start with the second one, the CapEx, and Ikram will answer you on the question on the export and volume front. On the CapEx side, yes, indeed, we -- the plan we see for this year in terms of CapEx is around SAR 1.9 billion. We are not yet completely certain, but this is in this range, which will be lower than the trend we have historically. We are currently preparing for budget 2020, so I don't have a precise number to give you, because I don't know. But the thing I know is that we are aiming at a lower number. A lower number, why? Because we believe, we have enough capacity to answer most of our categories, maybe, except Poultry, to face the demand we see in 2020. And it's -- I appreciate this question, because I know sometimes it's perceived, a company, which is not investing a lot, even though, SAR 1.9 billion is a lot of money, it's perceived as not being seeing a lot of prospect for the future. I would argue it's a good sign for Almarai, because after having invested massively during years, we are entering now in a good session of return where we don't need to invest as much, so we invest less, because we want to become more efficient. So I hope I have answered your question.

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

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And regarding your first question, so I'm looking at Slide 8 in results of the Q3 Other. I'll say of the 18% growth, 10% is due to pricing, mainly in Egypt. The balance is coming from Jordan and export, which is all volume-led.

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Abdulmalik Majed Al Salem, Al Rajhi Capital Company, Research Division - Analyst [33]

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Okay. About exports, what's the new market that was introduced?

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Ikram Ulhaque, Almarai Company - Head of Finance [34]

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The new market -- no, so this is mainly -- this is our export business. And in export business, if you look at only quarter-to-quarter, you will always see abnormalities. We are mainly exporting to Iraq. We are exporting to North Africa. And what happens because of the lower base and because of the seasonality, quarterly numbers in Other segment are always spiky. But I think -- and that's the reason of 18%. The year-to-date number is a better reflection of how the whole business is working out.

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

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One comment on export. Yes, there is a lot of volatility, because the base is small. But strategically, and maybe, we can comment later on this, we see export as the potential growth basket that we have not tapped appropriately. I think you should expect a good effort from Almarai to develop the exports revenue stream going forward.

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Operator [36]

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We'll hear next from Harry Whelpton from Vergent Asset Management.

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Harry Whelpton;Vergent Asset Management;Analyst, [37]

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Just on the UHT segment, I'm just trying to understand the market share gains, sort of, what was driving that really? Given that in the last quarter, you mentioned that market share had been coming down at the expense of SADAFCO. So if you could just expand on that, that would be really helpful.

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

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In terms of the volume share in Q3, look, SADAFCO, value share of the whole industry is getting stabilized. They are at same market share in August '19, which they were in August '18. They saw their market share gains in the last 3 quarters. What we are seeing is an easing of market share. Of the total category, they -- of the total milk category, including Long Life and fresh milk, they're about 13.7% and 13.8%. And that share has remained constant year-on-year. They had a few percentage point gains in the middle of the year. And now it's quite stable. They do gain market share during wintertimes, and now it's becoming more stable, as we speak.

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Harry Whelpton;Vergent Asset Management;Analyst, [39]

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So the numbers that you gave on Slide 6, that imply then that you've been taking market share from them? It's more of a consolidation of the market...

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Ikram Ulhaque, Almarai Company - Head of Finance [40]

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True. In the total market sense, in the total milk market, so we are -- so if I go back to winter period, they were about 15% and now they are about 13.5%, 13.7%. It's -- we have gained about 1.5 percentage points at the expense of other fresh producers and Long Life producers like SADAFCO.

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Harry Whelpton;Vergent Asset Management;Analyst, [41]

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Okay. And sorry, just to expand slightly on that. Are you seeing -- in terms of the market dynamic, are you seeing a further shift, because of the total, I guess, rebalancing of the cost profile of both products, like a movement towards more consumption of shelf-stable?

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Ikram Ulhaque, Almarai Company - Head of Finance [42]

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I'm sorry, I didn't get your question. Apologies.

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Harry Whelpton;Vergent Asset Management;Analyst, [43]

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So just to expand on that, I'm asking is that like -- as you see the cost profile of fresh milk to UHT change, because of the increased input cost, are you seeing a, sort of, movement in consumption towards more shelf-stable or not?

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Ikram Ulhaque, Almarai Company - Head of Finance [44]

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Look, I think, currently, as we speak, the pricing of -- in Saudi, especially, the pricing of Fresh and Long Life Dairy is very similar today. We're selling Fresh between SAR 4 to SAR 4.5 and Long Life is getting sold between SAR 3.75 to SAR 4.25. They are virtually overlapping against each other. So I think it's not the cost base, it's the pricing, which was driving the consumption. As the level of discounting is starting to abate, the Long Life pricing is getting more and more closer to the fresh category. And then this is why we do see a slight change. Is that change permanent? Are consumers consuming fresh dairy products continually? Time will tell. But as we speak today, from a pricing front, there's little for consumers to choose. One year ago, the level of discounting was so high, there was a difference of about 20%. Long Life Dairy was 20% cheaper than Fresh Dairy. And that discount level is now stabilizing, the gap is between 10%. And that's the reason we see a bit of market rebalancing.

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Operator [45]

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We'll move next to Hamad Albarrak from NCB Capital.

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Hamad Albarrak;NCB Capital;Analyst, [46]

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So you just mentioned that the gap between the fresh milk and Long Life milk is around 10% currently. Are you expecting this gap to reach to 0? And more on the Long Life milk, until when we expect this discount in the market to continue? My second question regarding, you just mentioned Iraq, you said you're exporting to Iraq. Are you exporting directly to Iraq or through Kuwait?

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Georges P. Schorderet, Almarai Company - CEO [47]

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Let me take the question, Hamad. The export to Iraq is via Kuwait. There is no entry point from Saudi to Iraq yet. We hope that there will be at some time in the near future. In term of the UHT and the Fresh discussion, I think, the UHT discount that we have seen in 2017, '18, was heavily driven by surplus milk in the country, which was primarily directed by all fresh producers into Long Life, which has led to a big price gap between Fresh and Long Life. Eventually, we see this gap is narrowing and the price average -- the average selling price on UHT is increasing. As you could see it in our numbers, UHT has also grown substantially in volume and in value. How do we foresee that going forward? I don't think that there will be drivers as they existed in the last 2 years to create a big gap. So this would remain, more or less, in a very narrow corridor of price gap.

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Hamad Albarrak;NCB Capital;Analyst, [48]

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Okay. And in term of volume for UHT segment, we're talking about the growth of how much for Q3, year-over-year?

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

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You're talking of Almarai, especially?

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

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Yes.

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Hamad Albarrak;NCB Capital;Analyst, [51]

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Yes.

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Ikram Ulhaque, Almarai Company - Head of Finance [52]

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Just give me one second. Look, it's about 2 million to 2.5 million liters.

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Hamad Albarrak;NCB Capital;Analyst, [53]

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As a percentage in terms of volumes.

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Ikram Ulhaque, Almarai Company - Head of Finance [54]

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As a percentage, it will be close to around 8% to 10%.

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Hamad Albarrak;NCB Capital;Analyst, [55]

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8% to 10%, okay.

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Ikram Ulhaque, Almarai Company - Head of Finance [56]

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Of revenue.

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Paul-Louis Gay, Almarai Company - CFO [57]

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No, no, 8% is the...

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Georges P. Schorderet, Almarai Company - CEO [58]

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8% is the answer.

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Paul-Louis Gay, Almarai Company - CFO [59]

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The answer 8% volume vis-à-vis a total revenue of 10%.

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Georges P. Schorderet, Almarai Company - CEO [60]

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10-point somewhat.

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Hamad Albarrak;NCB Capital;Analyst, [61]

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Okay. Okay. Regarding my second question -- okay, but export, you just mentioned that you've started focusing on export, and which region specifically you're targeting?

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Majed Mazen Rasheed Nofal, Almarai Company - Deputy CEO [62]

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Export, primarily for us, at the moment, is into countries with reasonable proximity. The Iraq is our largest market. North Africa is a key market. We do export a portfolio of products into Jordan as well out of manufacturing capabilities in Saudi. And we are looking at expanding our export into some other markets, but this is, as you know, going to take time.

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Operator [63]

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We will hear next from [John Monge] from [Verdant].

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Unidentified Analyst, [64]

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I have two questions. And the first one is with regards to modern food industries, your JV with Chipita and your L'usine bakery brands. Are there any plans to bring some of these products, some of these brands, to areas outside of the KSA and GCC, specifically into North Africa? And secondly, on the SAR 100 million, which is secured from the EBRD, for your operations in Egypt and Jordan. Can you give us a sense of how this cash is going to be spent? How much capacity are you looking to add in a market such as Egypt? And what do you currently have?

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Georges P. Schorderet, Almarai Company - CEO [65]

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And John, let me take your first question. We have a joint venture with Chipita to produce a range of Chipita products under the brand 7Days and distribute in the territory. Currently, our JV has a territory of GCC. So we have the right to produce and sell 7Days products in Saudi and GCC markets. We don't have the similar right for other territories. And we are looking at expanding, but I'm not sure if you will see us in North Africa soon.

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Paul-Louis Gay, Almarai Company - CFO [66]

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Now regarding your question on the EBRD financing, we're hoping -- firstly, it's a good endeavor to obtain support from such a financial institution. They are very demanding when it comes to compliance and Euro governance around the loan. The loan is meant to support -- it is not meant to finance specific project. It's a general-purpose loan. And this will be used to finance the growth we have in Egypt and Jordan, not specifically, for specific projects. We are -- as you know, we are finishing investment cycle in Egypt, in particular, and we will use this loan respectively to complete our CapEx investment or for general purpose.

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Unidentified Analyst, [67]

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Understood. And with regards to the CapEx investment, will this be in the Dairy or the Juices segment?

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Paul-Louis Gay, Almarai Company - CFO [68]

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This is -- in Egypt, it's both, it's Long Life Dairy and Juice. This is -- completing the investment, we have this new plant and we have invested into Dairy & Juice.

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Unidentified Analyst, [69]

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Can we get a sense of how much capacity you'll be adding in these markets?

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Ikram Ulhaque, Almarai Company - Head of Finance [70]

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Look, we are active in 3 areas, which is the yogurt and Long Life Dairy and Juice. Our capacity is enough to reach anywhere between, I'll say, 30% to 50% of the market. So we do have export capability in Egypt. So our primary market will be the domestic markets. And, of course, because we don't have a 30% to 50% market share in respective markets, we will see how we can use Egypt as a base for further exports into the Africa market.

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Operator [71]

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The next caller in the queue Samir Murad from NBK Capital.

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Samir Murad;NBK Capital;Analyst, [72]

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I have a couple of questions regarding your non-KSA markets. First on Egypt, if you can give us some color on what's happened in 3Q? Because if we look at the presentation, in 2H, it was up 6% and now it's up 11%. So 3Q must have been a very good quarter for you. Can you please like shed some light on that?

And if you can tell us a little bit about the challenges you're facing in the GCC markets, like VAT? And probably still give us some color on Kuwait and what's happening there? And do you expect this trend to continue in the next quarters or not?

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Georges P. Schorderet, Almarai Company - CEO [73]

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If I take the answer in Egypt, indeed, we see a revival in Egypt -- of the business in the top line, and this is due to the macroeconomic environment in Egypt, which has normalized after the devaluation we went through. So this base effect, where basically, we can see that in the -- that it is happening not only to us, it is happening to the competitors as well. So it's not something special to Almarai. So we are taking into the consumer the impact to some extent -- into the market consumer's consumption.

Having said that, you have the same phenomenon on cost. You have an inflation on cost. It's an inflationary country. And obviously, on the bottom line, this is less likely your objective to breakeven these operations. So yes, the top line is growing, but we're facing major cost constraints in Egypt. So that's the situation in Egypt. It's all depending about the economic situation, where Egypt is a very versatile country. And for the time being, rebasing. But we are cautious -- we are optimistic but cautious about the future, Egypt as well as ours.

On Kuwait, maybe, I'll relay it to Ikram.

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Ikram Ulhaque, Almarai Company - Head of Finance [74]

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Yes. On Kuwait, we -- some of our products were blocked from exporting to Kuwait, mainly Poultry. So again, it's a rebasing effect. We started our export of Poultry products to Kuwait about 3 months back. And that does show a very positive return and that's the majority of the increase. Probably 70% of the growth you're seeing or plus 8% of Kuwait is driven by the return of Poultry to the country.

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Paul-Louis Gay, Almarai Company - CFO [75]

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And the other one is Bahrain -- sorry, go ahead.

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Samir Murad;NBK Capital;Analyst, [76]

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Yes. I just wanted to ask about the other countries. Yes.

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Paul-Louis Gay, Almarai Company - CFO [77]

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Bahrain, definitely the minus 1% is due essentially to the VAT introduction. Before that, the -- it's minus 1.3%. Retail, it's minus 1% essentially due to this.

UAE and Oman are more particular. UAE, we are going through a tough time in UAE in the core category of Fresh Dairy & Juice where, actually, we declined. Whereas we grew in Food, Bakery and Poultry. But in the Dairy segment in UAE -- both Juice and Dairy, I'm sorry, we are struggling and we're actually declining. Oman, similar situation. The Dairy & Juice segments also been declining, whereas the Food and the Bakery -- particularly in Oman because we reenter Oman, we're doing pretty well. But net, you can see this is flattish, 0% and 1%. And unfortunately, we don't see that changing in Q4. This is going to go -- UAE as an economy is going through a tough time as well.

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Samir Murad;NBK Capital;Analyst, [78]

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So in the UAE, are you -- is that market decline or are you losing some market share in the country -- I mean, on the Dairy business?

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Ikram Ulhaque, Almarai Company - Head of Finance [79]

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Our market share remains pretty similar. And we believe it's the total markets which is seeing this decline. And our key point is again, it's the Fresh categories across-the-board. It's not just milk, it's Laban, it's juice. So it's a reflection of the tough conditions, which are in UAE, as Paul mentioned before.

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Georges P. Schorderet, Almarai Company - CEO [80]

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Okay. I think we're -- operator, maybe we're going to go for the next 2 or 3 questions.

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Operator [81]

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Yes, sir. Our next question, we'll hear from Adnan Farooq from Jadwa Investment.

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Adnan Farooq, Jadwa Investment Company, Research Division - Analyst [82]

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I have a couple of questions. Firstly, the Bakery segment profitability and margins significantly improved during the quarter. Is it something that is sustainable and due to a strategy change for you guys? Then second question is regarding the Poultry segment. You mentioned, Ikram, that 50% of the Poultry segment is going to HORECA this year. Next year, you guys want to expand the retail reach. Do you have a target in mind that let's say, 55% or 60% targeted towards retail? And one last question regarding the high P&C. The presentation mentioned that there is some subsidy removal. Can you elaborate on that as well as highlight towards when do you expect the crop plantation to positively impact the Other segment this year?

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Ikram Ulhaque, Almarai Company - Head of Finance [83]

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I'll start with just number one, and we'll share the other ones, Adnan. So I'll start with the Bakery question. Look, I think, again I would say for Bakery, instead of looking at quarterly number, our yearly number is more realistic.

If you go to Slide #13, which is the results by segment, Bakery net profit is 12.2%, very similar to what we've been running for last year as well. Bakery segment, we -- the top line growth of 6%, we do expect profit growth to be slightly behind because we are investing a lot in the marketing, in the brands. You've seen our big growth. We're launching new products and we are putting our marketing arm behind that because that's how we believe the whole category will realize. So expect a single-digit growth from the top line and expect a similar kind of profit growth in the bottom line as well. And we expect this profitable levels to continue very similar to last year.

In terms of Poultry, we don't have a specific target. We are selling [P plus 6], so it's very fresh product of Poultry that we sell in retail. And of course, we would like to maximize as much as we can with a lower wastage target. So we would -- our target, you can argue, is 100% retail, so that's unrealistic, practically. We will try to maximize as much as we can. But do expect retail growth to be anywhere between 5%, 6%, 7%, depending how on the market is going.

In terms of our P&C. Look, this is the subsidy removed in stage 3. I mean, Majed...

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Majed Mazen Rasheed Nofal, Almarai Company - Deputy CEO [84]

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Yes, I will highlight. And the subsidy has been removed on the stage 3. Stage 3 is a product meant for kids that are above 1-year old. It's still being maintained and it is on stage 1 and stage 2, which is 1 year or so below of age. And this is almost affecting around 35% of our sold volume. However, we need to keep in mind that technically, all infant formula is subject to a price cap by the government. We are expecting that for stage 3, when the subsidy has been removed, that price cap will also be lifted going forward, but it's not the case yet.

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Ikram Ulhaque, Almarai Company - Head of Finance [85]

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And regarding your last question on net income and when the crop plantation will come back. In Other activity, our net profit is minus SAR 40 million, as you can see on Slide 19. Of the minus SAR 40 million, probably half of it -- slightly less than half of it, it belongs to our P&C because of subsidy removal and what's happening in the market. Mainly 50%, SAR 20 million to SAR 25 million, relates to crop production. We expect to finish the year between SAR 5 million to SAR 10 million of breakeven scenario. So we do expect a positive Q4 for crop rotation will come across. But we don't expect as we see profitability to come back because of the subsidy removal issue.

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Adnan Farooq, Jadwa Investment Company, Research Division - Analyst [86]

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And one last thing, the culling of cows, the Other expenses that have been there this quarter, they were lower. Do you have a run rate of how much these losses will continue or will they continue going forward or not?

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Ikram Ulhaque, Almarai Company - Head of Finance [87]

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Look, we are -- our herd is remaining as is. We -- last year, we -- I think SAR 160 million was the losses we had on the culling of the herd. This year, we expect a similar number, maybe plus or minus SAR 10 million. But the herd profile remains very similar to last year. We haven't seen a huge turnaround in the pricing of the dairy herd in the market, in the meat market, so to speak. We are looking at options how we can realize more money. But as we speak here today, we expect a very similar kind of trend rate to last year, between SAR 150 million to SAR 160 million loss on the sale of the biological assets.

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Operator [88]

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We'll move next to [Khalid Alakarawi] from Falcon Financial Services.

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Unidentified Analyst, [89]

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First, following -- on behalf of Falcon Assets Management, we would like to thank you for this presentation. I have sets of questions. I'll start for the first question. In terms of Almarai's investment strategy, are there any opportunity we see or any segment can Almarai targeted for the upcoming?

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Majed Mazen Rasheed Nofal, Almarai Company - Deputy CEO [90]

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Can we go one by one, so we don't lose anything...?

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Unidentified Analyst, [91]

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Yes. Yes. Yes, this is my first question. Yes, this is my first question.

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Majed Mazen Rasheed Nofal, Almarai Company - Deputy CEO [92]

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So hold on.

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Georges P. Schorderet, Almarai Company - CEO [93]

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So yes. I mean, as part of the Almarai 2025, we said we would like to grow our turnover by 30% coming from new categories or new geography. And yes, in the last few months, and we will continue to do so, to look at entering into new categories. And we -- I mean, we did an acquisition this year, for example, Premier Food, which is a way to reinforce our footprint in HORECA or food services. We will continue to look at the market for opportunities to enlarge our product portfolio or our categories. You will understand that at that stage, we will not say comments on any ongoing project. But yes, between now and the next, say, 24 months, there will be some initiative going into new category, potential new geography.

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Unidentified Analyst, [94]

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So let's say, in the pipeline, there is some segments and new segments that you are talking good in that 24 months?

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Paul-Louis Gay, Almarai Company - CFO [95]

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Yes. There is always something going on. And as you know, sometimes you come to a positive result in negotiations, sometimes you are unable to move forward. But yes, Almarai is look at entering into new categories and new geographies.

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Unidentified Analyst, [96]

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Yes. My second question's regarding to the financials. About the cost of funding that has been increased by SAR 30 million. Can you go through this? You're repricing the -- your loans? And if you can just clarify some of it.

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Georges P. Schorderet, Almarai Company - CEO [97]

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Yes. I mean the -- this one needs to be read in view of the capital sukuk. Half of the increase on the quarter is due to the fact that we now account -- we have refinanced the capital sukuk in choosing the accounting foreign equity into the P&L. So this presentation is creating an effect base of approximately SAR 0.5 billion. If you look at the cash flow, you will see that interest expense has increased but for much less than what you see in the P&L. The rest of the increase is simply due to the fact that over the period, there has been a -- 2 elements: one is the interest rate, the base interest rate increased. We also opted to go longer in our borrowing to take advantage of longer interest rates, historically. So this is affecting us in the short term because indeed, it is more expensive to finance 5 to 7 years than to finance short term. But we think that in the long term, this is the right thing to do. And finally, because we are releasing enough CapEx, we are capitalizing less interest than we used to. So this is also affecting the interest line in the P&L.

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Unidentified Analyst, [98]

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Yes. My third question is regarding -- go ahead.

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Georges P. Schorderet, Almarai Company - CEO [99]

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No. No. What I'm saying is that our cost of funding, net-net, is slightly increasing. But again, this is due to the interest rate environment and the choice we make on our profile.

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Unidentified Analyst, [100]

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Yes. So are you going to reprice these loans?

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Georges P. Schorderet, Almarai Company - CEO [101]

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Yes. We constantly -- I mean, we constantly look at optimizing our operating cost, so I cannot tell you. If you look at the market, we believe we are appropriately priced today. So we are constantly agile and looking at the opportunities.

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Unidentified Analyst, [102]

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Yes. My third question is regarding to the Egypt markets. As we know, markets -- Egypt markets are challenging and fierce. Are there any plan to spend more for example, in marketing expenditures or...

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Georges P. Schorderet, Almarai Company - CEO [103]

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Egypt, with the market dynamic, we have to invest appropriately in marketing. The answer your question is yes, but we will do it in a responsible way. We are not going to expose ourselves to overspending in marketing. But you have to invest to be present in the market, otherwise you will be losing market opportunities. So the answer is yes, but we'll do it with respect to the bottom line as well.

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Unidentified Analyst, [104]

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So you will spend heavy marketing expenditure on this?

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Georges P. Schorderet, Almarai Company - CEO [105]

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I am not sure of the -- we'll spend what is appropriate do not -- to be -- to take opportunity of market development and sales growth.

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Paul-Louis Gay, Almarai Company - CFO [106]

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I mean following the devaluation, which took place in Egypt 2 years ago, I think we -- our strategy was to defend margin or to reestablish the margin level as a priority towards market share. Now I believe this is something that we have done in 2019. Probably going forward, towards 2020, we may look more towards, again, volume and market share without deteriorating the margin position. But this year, definitely, the priority was reestablishing a margin level which was, in short, acceptable to us.

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Unidentified Analyst, [107]

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Yes. Good. We move now to the Bakery, due to Bakery market share. Market share is down 1% year-on-year on the Bakery segment. So on the other hand, revenue on the profit was increased. Can you clarify how do you would be able to increase it?

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Ikram Ulhaque, Almarai Company - Head of Finance [108]

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So the market share, the slide you saw was on August year-on-year. If I look at the whole MAT, which is not available on the slide, but the market is growing by about 5% on an MAT basis, and I'm talking here on value and volume basis, both. So for us -- and this is very much reflected in our revenue share as well. We have about 6% -- I'm sorry, our growth year-on-year is about 6%, which is slightly ahead of the market growth rates. The reason of the profitability growth is coming because of the fixed cost base. Within Bakery, although we're investing more in marketing, the depreciation in the plant remains at a very fixed level. So volume growth automatically results in a higher, I would say, base growth.

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Georges P. Schorderet, Almarai Company - CEO [109]

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Okay. We will move to the last question.

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Operator [110]

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We'll hear from Marc Hammoud from JPMorgan.

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Marc Hammoud, JP Morgan Chase & Co, Research Division - Analyst [111]

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A follow-up question on your debt position. So it hasn't changed much this year. And as you said, Paul, your free cash flow is likely to double in 2019 to about SAR 2.4 billion. Can we have an idea about the maturity profile of the debt? So how much is due for repayment or refinancing over the next 12 to 18 months? And how much of the SAR 2.4 billion of free cash flow will go into deleveraging and repayment of debt?

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Paul-Louis Gay, Almarai Company - CFO [112]

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Okay. I don't have precise numbers, only from memory and we'd like to correct it, but we have debt redemption due in March of approximately SAR 1.2 billion. That's what we are facing for 2020 that we are -- so this is the answer to your question, how much is the refinancing short term we have. Of course, we have facilities and we have free cash flow to repay. I don't see any problem. So I would say around half of the free cash flow generation will be available for debt redemption beyond the refinancing.

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Marc Hammoud, JP Morgan Chase & Co, Research Division - Analyst [113]

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So most of the debt maturing in 2020 will be repaid not refinanced?

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Paul-Louis Gay, Almarai Company - CFO [114]

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Yes, you could say that. Most of it, 80% yes. This is how we get the debt down.

Could we close the call, operator? Because I would like Georges to make a closing statement.

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Georges P. Schorderet, Almarai Company - CEO [115]

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So ladies and gentlemen, thank you very much for attending this Almarai Q3 '19 call. It's always a pleasure having you. I would also like to also say thank you to EFG Hermes for organizing the conference call, in particular to Nada Amin who has been serving for a long time. So thank you very much. And we look forward to having you back early in January for our Q4 2019 results and full year results. Thank you very much, have a wonderful evening.

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Operator [116]

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Thank you, everyone -- today's teleconference. We thank you all for your participation.