Almarai had its 4Q15 conf. call on 18 January. Focus was on ongoing efforts to mitigate the impact from subsidy reforms and greater imported feed volume.
• Impact from higher energy & utility prices: Almarai expects a cSAR200mn rise in direct costs and an indirect impact of cSAR100mn (outsourced transport services and packaging – latter is unconfirmed). Some may be offset by planned measures that focus on improving distribution efficiency (see p3). However, it did not quantify the impact of these cost reduction efforts.
• The increase in imported feed volume (c70% now) to comply with government’s directive to phase out green fodder cultivation by Jan. 2019 will add cSAR200mn to costs (net of subsidies) in 2016e. No indications that the government will stop subsidies on imported feed (c15% of 2015 earnings) but in the event that they do, the company will take ‘necessary actions’.
• No changes in regulated prices of fresh milk and laban (set by ministerial decree) but a price increase is likely over time.
• Commodity prices benefits and volume-driven top line growth in 2016e should also somewhat offset the abovementioned cost pressures.
• Poultry cash flow positive in 2015 and on track for 2016 profits; pace of quarterly losses eased on challenges such as difficulties tapping B2B segment.
• IDJ performed well and almost broke-even; Egypt fared well but revenue was down in 4Q15 on temporary sales stoppage of some juice SKUs; Jordan is the main challenge but expect turnaround with new Almarai-appointed management in place.
• Infant formula remains loss-making with break-even target set for 2018.
• Bakery performed well despite production shortages (briefly discontinued some products like cupcakes) following 4Q14 fire aided by new high-margin products; volumes to recover when new plant comes on line in 2Q16.
• Became FCF positive in 2015 for the first time in five years aided by better working capital management (inventory & payables days on hand) and profitability (mostly poultry that was consolidated in late 2009).
• Still targeting c18% EBIT margin in medium-term but will be challenging.
• 2015 highlights: i) robust growth in all segments and markets (except cheese & Jordan); ii) gained market share in all segments except KSA UHT milk; iii) 15 new products launched; iv) full settlement of bakery plant fire insurance claim.
• Most challenging segments in home market are long-life dairy (comp.) and cheese (competition in processed cheese, weak export markets).
• Committed to 2016-17 capex plans (cSAR4bn/year) as demand is unlikely to waiver; will launch a new bakery plant in 2Q16, CPP3 (for dairy) in 2017 and a cheese plant. While it anticipates the need for CPP4 and new juice & bakery plants, the timing may be revised if necessary.
• Small impact from rising interest rates as 60% of LT borrowings are hedged.
• Juice and laban volumes could benefit from planned taxes on carbonated and energy drinks to be implemented by January 2017.
• Looking to add further overseas agriculture prospects, outside Argentina and the US (new land acquired in California in 4Q15).

Nada Amin
Hatem Alaa, CFA