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Edited Transcript of AGLTY.KW earnings conference call or presentation 20-Aug-19 11:00am GMT

Q2 2019 Agility Public Warehousing Co KSCP Earnings Call

Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Agility Public Warehousing Co KSCP earnings conference call or presentation Tuesday, August 20, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ehab F. Aziz

Agility Public Warehousing Company K.S.C.P. - CFO

* Soriana Borjas

Agility Public Warehousing Company K.S.C.P. - Senior Manager of IR

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Conference Call Participants

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* Sidharth Saboo

Arqaam Capital Research Offshore S.A.L. - Equity Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Agility's Second Quarter 2019 Results Conference Call and Webcast. I now hand over to your host, Mr. Sidharth Saboo from Arqaam Capital. Sir, please go ahead.

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Sidharth Saboo, Arqaam Capital Research Offshore S.A.L. - Equity Research Analyst [2]

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Good morning and good afternoon, ladies and gentlemen, and thank you for joining us today. This is Sidharth Saboo. And on behalf of Arqaam Capital, I'm delighted to welcome you to Agility's Second Quarter 2019 Earnings Webcast. I have with me here today Mr. Ehab Aziz, Group CFO; and Agility's Investor Relations team.

Without further delay, I'll now turn over the call to Soriana, Agility's Investor Relations Senior Manager.

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Soriana Borjas, Agility Public Warehousing Company K.S.C.P. - Senior Manager of IR [3]

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Thank you. Good afternoon, and welcome to Agility's Second Quarter 2019 Analyst Call. As we have always done, Mr. Ehab Aziz, our Group CFO, will walk you through the presentation which you have available to discuss the group's operational and financial performance during this period. After which, we will open the floor for your questions. If you would like to ask any questions, please type it in the Q&A box on your screen anytime during the presentation, and we'll address it during the Q&A session at the end of the call.

Before I hand over the mic to Ehab, I would like to draw your attention to the disclaimer available on Page 2 as this presentation might contain forward-looking statements. Such statements are subject to risks and uncertainties as various factors, many of which are beyond our control, may cause actual developments and results to differ materially from expectations contained in the presentation. Please take a moment to read it.

Thank you. Ehab, over to you.

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Ehab F. Aziz, Agility Public Warehousing Company K.S.C.P. - CFO [4]

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Good day, everyone. Thank you for joining our earnings call for Q2 2019. I will start with the financial highlights, and then we'll move to the business segments highlights, the GIL and the Infrastructure, and then we will move to Q&A.

As usual, the first slide is about the group performance -- overall group performance. We witnessed in this quarter continued growth despite a weak market, particularly in the GIL segment, freight forwarding particularly. EBITDA for the quarter showed double-digit growth even if we were to exclude the IFRS 16. IFRS, as you may know, is related to the operating leases, which had been capitalized and is excluded from SG&A and accordingly had a major impact on P&L classification as well as the leverage and the debt level. We have a slide at -- towards the end of the presentation that will explain how IFRS impacted our numbers at every level.

So EBITDA has been -- growth has been growing year-over-year even if we exclude the IFRS impact on it. The IFRS impact on net income has been negative, so we have witnessed higher growth rates excluding the IFRS 16 in terms of net profit. In the second quarter, we continue to see growth within each of our main business units. I'm happy to see them deliver in line or better our expected plans for the year. As you may already know, we operate under 2 business groups, GIL, which has all our logistics business and services; and then Infrastructure group, which has about 5 main operating entities in different sectors and different operating units.

GIL is the main contributor to the group's revenues. They posted good numbers for the quarter despite again lower air volume -- Air Freight volume as well as marginal Ocean Freight volume for the quarter. So the theme for freight forwarding this quarter has been the lower volume and the higher margins. So net-net, we were up in terms of net revenue as well as revenue on a constant currency basis. However, in terms of volumes, air tonnage and ocean TEUs, we witnessed the negative growth quarter-over-quarter for the year, and this has been definitely impacted by the uncertainties around the U.S.-China trade deals, et cetera. And I think when we look at all the competitors, that is a common theme across the industry. It's not only related to us. However, despite the decline in volume, we have seen a much higher yield, which has compensated for the decline in volume.

In terms of Contract Logistics, very consistent, has been delivering very good results year-over-year, very consistent, very stable, and that continued in Q2 for the year. Infrastructure group delivered also very good growth year-over-year. Each entity is pursuing its road map to deliver growth and improve efficiency within their respective operations, and we'll see that later in the presentation.

Moving to Slide 5. This is in essence what I have highlighted in the previous slide -- in the previous discussion, however, in more detail. Revenue, as I said, as you can see, increased from about KWD 384 million to KWD 396 million for the quarter, about 3.2% year-over-year. Again, there has been a negative currency impact on the number. If we were to exclude this currency impact and report on a constant currency basis, the growth year-over-year would have been 5.7% instead of the 3.2% growth that is being reported.

Net revenue increased to KWD 129 million from KWD 124 million, a growth of about 3.9%, and the reported net revenue margin stood at 32.6%, slightly higher than last year. In terms of EBITDA. EBITDA grew at a double-digit rate, 31.2%. Again, this is driven primarily by the IFRS impact. The pre-IFRS EBITDA growth, as I said, was still double-digit growth of about 12.6% for the quarter. EBITDA margin stood at 12.3%, up from the 9.6%, which is again driven by the IFRS impact.

In terms of net profit, net profit stood on a reported basis at about KWD 21.6 million. That's an increase of 8.1%. If we were to exclude the IFRS impact of about KWD 700,000 for the quarter, our net profit would have been KWD 22 million, about 11.5% year-over-year growth. So IFRS had a negative impact on our net profit for the year.

Moving to the following slide, Slide #6. This is the half year earning results for 2019. Revenue grew by 2.5% to -- from KWD 756 million to about KWD 775 million. Also, this was translated in growth in net revenue, which grew from KWD 248 million to KWD 253 million. EBITDA growth increased by 27% to reach about KWD 95 million. Again, this is driven by -- partially by the IFRS impact for the quarter.

Net -- in terms of net profit, we reported KWD 41.9 million, about 7.7% increase. If we were to adjust for the IFRS, our net profit would have been KWD 43.1 million, about 10.7% increase. So definitely, in today's market environment, the growth in net revenue in terms of the Q2 and the H1 I think have been satisfactory in the context of the current market conditions.

Moving to Slide 7. Now this shows the contribution by business group -- from the different business group in terms of revenues and EBITDA. You can see that most of the growth is coming from the Infrastructure. Again, this is driven by the ALP, Tristar and the different -- but also, this is where most of our CapEx has been going over the past 3 years. So on EBITDA basis, GIL has contributed additional 11.7%. As you can see, it's KWD 11.7 million. That's mainly driven by the IFRS. GIL year-over-year for the 6 months in terms of H1 has been flat. EBITDA has been flat. The pre-IFRS and the Infrastructure is about 7.4% year-over-year growth.

Moving to Slide 8. It's a picture of the balance sheet and how the balance sheet has evolved. Again, a significant impact of IFRS on the balance sheet. I remind you that we have a full slide at the end that would show you line by line the impact of IFRS on balance sheet and income statement. But in summary, asset -- on an asset basis stood at about KWD 2 billion and about KWD 1 billion in equity.

In terms of debt, net debt has increased. There is about KWD 100 million -- KWD 102 million of the KWD 307 million included in H1. That number is due to the IFRS impact. So the increase from H1 2018 to H1 2019 is not as much. It is amplified by around KWD 100 million. So almost 1/3 of our net debt is coming from the impact of IFRS and the changes of the accounting treatments.

If we look at net debt to EBITDA, stands at around 1.6x, and I would say that's still within our comfort level. As we communicated before, we expect our net debt-to-EBITDA not to exceed 2.5x in the normal course of business.

Moving to Slide 9, which shows the cash flows and the story for the cash flow for the 6 months ended June 2019. We have improved our operating cash flow. It stands at around KWD 41 million for the first 6 months, compared to KWD 29 million last year. However, due to the CapEx that have been invested during the 6 months, and there is a picture of how -- where the CapEx have been allocated by the different entities of the business units on the right side. Our free cash flow has been negative about KWD 16.9 million for the 6 months. On the CapEx side, you can see, since we started communicating the CapEx program in 2016, you can see that CapEx have been allocated primarily to the Infrastructure group.

What is classified for the 6 months under Other is mainly the contribution to -- about KWD 21 million contributed to the Reem Mall. So we expect the CapEx to be more or less in line with the last couple of years around KWD 100 million, and we expect again that to increase and boost our profitability in the Infrastructure group. GIL is more focused internally. It's not a CapEx-driven business. However, there might be some acquisitions or mergers as we had tried to do earlier in the year. So that would be a totally different discussion. And as and when this materialize, it will be communicated to the market, the different dynamics and the economics of that acquisition.

Moving to Slide 10. So I think that's the business group historical GIL in terms of performance -- actually Slide 11, not 10. The Q2 results steadily declined, as we mentioned, by 2.6% over the period last year. However, this was mainly driven by negative currency impact. On a constant currency basis, we will have shown a growth of about 1% in terms of revenues. However, we don't necessarily forecast on revenue because, as you know, it is mainly freight forwarding business, and the freight forwarding is a pass-through. So revenue is more a function of rates and rates might fluctuate up and down. So we -- the better metrics for GIL would be net revenue as a proxy of the level of activities.

And as you can see, this has seen a growth of about 4.1% quarter-over-quarter and on a constant currency basis about 6.1%. So I would say, for GIL, given its current market condition, which I mean, as I said, we look at all the competitors and we see -- we look through their numbers. The market has witnessed a significant decline in volume year-over-year, and we have also witnessed the same. However, our numbers -- overall numbers have been positive as witnessed by the growth in net revenue of 6.1% on constant currency basis. The story for freight forwarding, again I repeat, is declining volume. You can see quarter-over-quarter in -- Air Freight volumes have been down 8%; Ocean Freight is 2% down. However, the yield for Air and Ocean have compensated. And as a result, the net revenue has increased by 4.1% on a reported basis, that's in KD, and 6.1% on a constant currency basis.

If we look at the regional view, Middle East has witnessed a decent growth year-over-year for the quarter, about 11%; Asia, a decline of 6.8%; Europe almost flat; and Americas is down about 8%.

Moving to the following slide, which shall be -- which is the Infrastructure. Again, as I said, most of our investments in CapEx, as you'll have seen in the previous separate slides, CapEx have been directed towards Infrastructure. And as a result, we can see a significant increase in EBITDA year-over-year. So as you can see, the revenue for the -- for this group of companies, which we call Infrastructure, increased by 20% and EBITDA has increased by about 18.2%. In terms of entity, Agility ALP increased -- the revenue grew by 15%. And this is mainly coming from the contribution of the facility that we have completed last year, and now we have a full year impact of those facilities. In Kuwait and Saudi, we have completed around 150,000 square meters last year, so we started to see full year impact in 2019 of those investments. Saudi -- ALP Saudi is progressing very well. We see significant and strong demand in that space. The Phase 2 of the development were completed. We completed 2 of the 3 warehouses in Phase 2. Each is 40,000. That's coming online. And then hopefully, we'll also commence and complete the last phase, which is -- last warehouse, which is another 40,000. So the total phase would be around 120,000 square meters.

In Africa also, which has been -- some good level of investments have been going over the past few years, the Ghana is online by the end of the year or maybe towards Q1 of next year. We should have the Ghana operational, which is -- already phase 1 is operational, but also Phase 2 and 3. Mozambique, Ivory Coast and Nigeria, we would have Nigeria prepare the land -- we acquired the land and we have started the development of facilities in Nigeria. So by the end of the year or Q1 next year, we would have facilities operational in Ghana, Cote d'Ivoire, the Ivory Coast and Mozambique. And next year, Nigeria should commence the development.

In terms of Tristar, growth of about 23% in terms of revenues year-over-year. That's mainly driven by growth in roads, transport and warehousing operations as well as the shipping business. Tristar was successful in securing new business, particularly in the shipping space. And if I would maybe make one remark on the shipping business that we invest in -- that we have been actually investing in for the past several years, it's not the speculative type of shipping. It is primarily customer-driven -- blue-chip, customer-driven investment that we make. So we -- as we announced, we had the first project with Shell. We have another one with Shell, BP, Total, et cetera.

So we are investing in -- our investment in shipping is driven by customer demand and customer requests to do investments in that space. It is back to back, and it is also financed by -- 70% roughly is financed -- or the value of the ship is financed by banks. So everything is back to back. It is on a nonrecourse basis to -- definitely to the group, and sometimes it's limited recourse to Tristar. So the risks involved in that operation, in the shipping operation, is very, very limited, I would say. And it allows us to scale up with customers who are reputable and strong. So we are not buying ships and speculate in the open market. We don't do that. We basically buy the ships and operate them for blue-chip customers. So that has been the main driver for Tristar.

UPAC has been witnessing some decline, and there have been changes in Kuwait and there has been additional terminals in Kuwait, and that has slightly impacted the UPAC numbers. UPAC is developing the Reem Mall, as you may know, in Abu Dhabi, and the construction of this project is progressing well and scheduled to open in late 2020.

NAS, which is our aviation business, witnessed 1.6% year-over-year growth. It has been a challenging year for NAS. As you may know, they operate in different regions, including Afghanistan, in Africa, in the Middle East. And some of these places have been witnessing slowdown or closure of airspace, which resulted in reduction in commercial ports. So there are various reasons, but I would say we are very confident in NAS' ability to grow organically and inorganically. They have been growing over the past several years extremely well. And I think in the pipeline, there are several opportunities -- inorganic opportunities in terms of M&A that might actually boost NAS' numbers over the next few years, but we still remain confident in NAS' ability to continue to grow and create value for the group.

GCS, which is the customs modernization company, posted revenue growth of about 12%. And this is mainly driven by 2 things. One is the -- it's a proxy for trade in Kuwait. And accordingly, if trade volumes in Kuwait is up, GCS revenues would go up. So that was one of the main reasons. But also, they have been able to identify and implement new initiatives to drive the productivity and drive enhancement in revenues. So I would say, overall, GCS has been performing very well, and we expect it to continue to do well over the next few years as well.

I will conclude, as I mentioned in the previous slides, with the big picture of the impact of IFRS and how IFRS 16 is quite, I would say, confusing for many, and it distorts the numbers, year-over-year comparisons. So we thought to put one slide that shows the impact by every line so you can then exclude the numbers if you wish to make a like-for-like comparison to last year. So as you can see, EBITDA impact is about KWD 13.9 million, the SG&A is negative KWD 12.3 million, and that's mainly due to the exclusion, the removal of the operating leases. So I see one question about why SG&A is down. So that's primarily the reason behind it. And accordingly, EBITDA has improved by KWD 13.9 million for the 6 months. Depreciation has increased by KWD 12.5 million and EBIT is positive KWD 1.4 million. Financing costs increased by KWD 2.6 million. And accordingly, net profit is down by 1.2% (sic) [KWD 1.2 million]. Assets due to the capitalization of the operating lease increased by about KWD 94 million. And equity and liability increased by about KWD 94 million, which is also partially impacting the increase in net debt.

With that, I would open it maybe for the questions, and then we conclude after that.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Ehab F. Aziz, Agility Public Warehousing Company K.S.C.P. - CFO [2]

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So the first question is about the GIL EBITDA and how optimistic are you on reaching the 4% to 4.5%?

I think if you follow GIL and what they have been doing over the past several years, you can see that definitely they have improved. So in terms of confidence, I have confidence that this story will continue to improve and EBITDA to improve. However, the market conditions have been extremely challenging, as you can see. And we are also confident that we can navigate through this change. It's not the first time we faced such challenges. However, it makes things more difficult for us.

So there are 2 pillars in GIL. One is the internal pillar, which is we are focusing internally on technology, rolling out the system, which should help improve productivity, efficiency, et cetera. However, that -- so that's one pillar. The other pillar is we are actively looking at M&A and ways to unlock value. And as we have seen from our previous M&A discussions, and we've been looking at the trends and how M&A create value for some of the industry players, we can clearly see that synergy is a key driver in this space going forward, so -- particularly cost synergies.

So we are actively looking at M&A and suitable M&A deals, whether this could result in an acquisition for cash or a merger of equals or some sort of a combination. We are not yet sure how this will materialize because there aren't many targets like that. But I'm confident, even without any M&A, GIL will continue to progress and improve its margins and improve its profitability over the next several years. However, as I mentioned, the inorganic path is quite challenging in today's market environment, but this is something that we have navigated through in the past. So that's with regarding the GIL.

Another question about the ownership in Reem Mall and the expected normalized EBITDA level for the mall when it's fully operational.

As we mentioned before, this is -- our investment in the mall is through a convertible debt, so we might end up with 0 ownership. That could be an option as and when the mall is completed. But -- and this can go up to 75%. So it's -- if we don't convert, then it's 0 ownership. Or actually, we have a very small equity at stake that could become maybe a margin of 2 percentage points, up to 75%, and we consolidate the mall.

If we opt for consolidation, our estimates for EBITDA once the mall is normalized is about $100 million to $120 million. Again, this space, as you might know, is very challenging. However, we are optimistic that things over the medium and long term would improve and the asset would prove to be a good asset for the long term. But in terms of expectation of EBITDA, once everything normalizes and the market normalizes as well, it's around $100 million to $120 million of EBITDA for the entire operation -- entire mall.

There is a second question. The pre-leasing -- again about the malls. Have you seen any major brands leaving Reem Mall for the Galleria Mall?

I mean our leasing -- pre-leasing numbers stands today at around 36%, which is not -- I mean, not a very bad percentage, given the current market conditions and given also the competition. Now I'm not aware of any major brand that had left to Galleria Mall. Galleria Mall is already there. So it was already functional and operational. So I'm not sure -- we haven't seen any major brand moving to Galleria. It preexists our mall.

So another question. How much of the business volume of GIL segment terminates, originates from the Middle East geography?

I mean, relatively, Middle East, when it comes to freight forwarding, is relatively small. The main movements of -- I mean, 80% of the movement is among the other regions: Europe, Asia and Americas. So Middle East is not significant when it comes to freight forwarding. However, Middle East is a significant component of the Contract Logistics business. It's about 50% of the overall Contract Logistics.

Do you have any -- one question about Tristar -- and the splitting of the Tristar entity?

As we communicated before, Tristar is evaluating and actively pursuing an IPO, and there are several consultants and advisers already engaged in this process. If everything goes well and the market is ready for an IPO and we receive the appropriate valuation for Tristar, probably this will be happening toward next year, 2020. 2020. So that's the update on Tristar.

Okay. Question about the margin improvement.

Again, the margin improvement is -- I mean we cannot generalize it, but one big component is IFRS impact. So I don't know if you are talking about the net revenue margin or the EBITDA margin, but a big chunk of the EBITDA margin improvement is coming from IFRS 16. If you were to exclude that, I think, still, margin would improve. And that's due to 2 things. One, the business mix is -- Infrastructure is contributing more in terms of EBITDA, and Infrastructure tends to have higher margin. So that's adding to the improvement in EBITDA margin ex IFRS, but also there is an improved efficiency and productivity gains year-over-year, but it's marginal relative to the overall picture.

In terms of net revenue margin improvement, that's primarily driven by yield. So in GIL, yield has improved significantly, despite the reduction in volume. So that has improved the margin. And also, as you can see, revenue in Infrastructure has -- had a higher growth rate than GIL, which also had higher net revenue margin. And accordingly, the overall net revenue margin for the group has improved.

There is a question about the other income -- other income growth. I mean these are different things that are nonoperational. So we had a fund that we invested in maybe 7 years ago with Mubadala. And some of the income that we received -- now the fund is selling the asset and realizing some gains. So some of the gains go there. So it's a bucket that has bunch of different things from different entities that are in nature non-operations. So that's basically the other income there. So it's inconsistent. It's nothing that we can actually anticipate or forecast or expect to grow or witness innovative growth going forward. We don't know actually. So it's a bucket that we lump all the nonoperating income in it.

In terms of customs case, we don't have provision for the customs case. It's actually a case from us. Again, it's the government. We had -- I think, first, we had a court order in our favor. So if any, we would report a gain, and we don't have any associated liability with it. That's for the customs case.

Current case for Amghara. There is a full disclosure in the financial statement about the legal cases, and there is an ongoing legal case for the Amghara property. So I mean I think this week, the financials will become available so you can read the full disclosure about the case.

I think we addressed these questions. There is a question about drop in G&A expenses.

Again, that's due to the IFRS. And I hope the slide explains why the expenses, SG&A, has reduced and the impact of the reduction. So that's mainly why our SG&A has reduced. If you add it back, the growth is not significant year-over-year.

I think there is one more question about can you expand warehousing in Kuwait? How much is the capacity there and what's the utilization there?

I don't think I can address that question in detail here because there are a lot of numbers, and I don't have all the latest numbers. How much of the land is developed, undeveloped, but we have a large land bank in Kuwait. That large bank is -- some of it is open yards, and this is where the opportunity for development exists because we can convert the open yards into warehousing facilities, which we have been actually doing over the past several years, but not maybe as aggressive as we should. And there is an existing facility that we have. Some of those facilities are related to GIL, and some of those facilities are related to the ALP, but it is a significant -- and we can address that question one on one when we have all the details and we can walk you through the different numbers.

I guess that's it. I don't see any other questions there. So I think I can conclude by thanking you and reassuring you that despite the current market conditions and the difficult environment that we all see and witness in different industries and the uncertainties, whether it's interest rates uncertainties -- related uncertainties or recession uncertainties or trade war between China and the U.S., I think we continue to be resilient, and we continue to do our best to navigate through these different challenges. Thank you very much for your attention and joining us today.

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Soriana Borjas, Agility Public Warehousing Company K.S.C.P. - Senior Manager of IR [3]

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Thank you, Ehab, and thank you all for joining us today. Before we end the call, we would like to remind you that this presentation is available on our website, and we will post the transcript along with the presentation on the relevant stock exchanges. Thank you. See you next quarter.

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Operator [4]

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This concludes this webcast. Thank you all for your participation. You may now disconnect.