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Founded in 1977, Almarai Company is the world’s largest vertically integrated dairy company and the region’s largest food and beverage manufacturing and distribution company. Headquartered in the Kingdom of Saudi Arabia, Almarai is ranked as the number one Fast Moving Consumer Goods (FMCG) brand in the Middle East and North Africa (MENA) region and is market leader in most of its categories across the Gulf Cooperation Council (GCC).
After more than 40 years of sustainable growth, Almarai continues to provide nutritious and healthy products to consumers of all ages, with success derived from the bedrock principle of ‘Quality you can trust’. In addition to its high-quality dairy products, Almarai has diversified its product portfolio to include juices, bakery, poultry and infant formula under the major brand names Almarai, L’usine, 7DAYS, ALYOUM, and Nuralac. Meanwhile, the Company operates successful joint ventures with Chipita and PepsiCo.
Challenges exist in the macroeconomic environment in which we work. This year, Saudi Arabia and other GCC countries introduced value added tax (VAT). This new regulation, along with other factors including the introduction of dependents’ fees for expatriate workers and increased energy costs, put pressure on consumers, retailers and manufacturers. In addition, a number of expatriate workers left the Saudi labor market, which directly reduced consumer spending. These adverse factors existed for much of the year, but Almarai was ready for their impact and navigated the challenges they brought.
Meanwhile, on a positive note, improvements in oil prices gave the GCC economies a tangible boost, as they continue to structurally reform and to diversify their sources of income. Saudi Arabia remains a regional leader in this regard, with the effects of the National Transformation Plan and its parent programme – Vision 2030 – already bearing fruit. As a leading Saudi corporate, we are proud of the active role that we play in supporting the Vision, and we see our own growth and international expansion as directly linked to the national agenda. We will continue to empower and grow the Kingdom’s workforce, as together we strive for a more dynamic and vibrant economy.
This year, it was my privilege to write a foreword for Almarai’s first ever Sustainability Report, pertaining to 2017. The Report sets out our six pillars of sustainability: to promote responsible consumption; to ensure ethical and sustainable sourcing; to prioritize quality and safety; to reduce natural resource use and waste; to nurture and reward colleagues; and to generate significant economic value.
Today, these pillars form the basis of our sustainability strategy, focusing the Company on our key material issues. Highlights in 2018 included our successful transition to the 100% importation of animal feed requirements, relieving pressure on the Kingdom’s precious supply of water. We have also continued to grow the scale and depth of our Future Leaders and Graduate programmes, improving the effectiveness of our workforce. Furthermore, we introduced 35 new products to the market, fueling the long term value generation challenge for the Company and delighting our consumers.
In 2018, the Board of Directors continued to perform its duties with the diligence and commitment that has characterized its work. In March, the Board announced the resignation of Engr. Rayan bin Mohammed Fayez (a non-executive Board Member and representative of the Savola Group, as well as a member of the Executive Committee), along with the appointment of Engr. Anees bin Ahmed Moumina (as non-executive Board member and representative of the Savola Group, as well as a member of the Executive Committee). The appointment was approved by shareholders at the Annual General Meeting. We thank Engr. Rayan for the commitment he showed during his time on the Board, and we welcome Engr. Anees.
In October, the Company announced Board approval for the establishment of a Risk Committee, as per Saudi Arabia’s new Company Law and our own Corporate Governance Code. The standalone Committee will strengthen our governance architecture and is composed of accomplished and experienced professionals with broad business experience. The Committee is chaired by Mr. Bader bin Abdullah Al Issa, a non-executive Board member and representative of the Savola Group.
Perhaps our most important Board announcement of the year was to inform the market that Almarai’s Chief Executive Officer (CEO) Georges P. Schorderet, will retire in 2019 after 15 years with the Company. Georges very much deserves his retirement, having been an immensely important asset to our business throughout his tenure. We wish him well in his retirement and we look forward to welcoming Alois Hofbauer as our next CEO. Alois has a proven track record of successful leadership at large multinational food and beverage businesses and will bring valuable experience to the role.
Almarai’s total market capitalization as at 31 December 2018 reached SAR 48.0 billion, with 1 billion shares in issue. At the Annual General Meeting, to be held on 7 April 2019, the Board of Directors will propose a cash distribution of SAR 850 million, which is equivalent to SAR 0.85 per share or 42.3% of Net Income.
It remains for me to express my gratitude to fellow members of the Board of Directors, for the steady guidance and wise judgment that they have delivered throughout the year. On behalf of the Board, I would like to thank Almarai’s management and staff, for their ongoing and tireless commitment to delivering on the Company’s promises to shareholders and consumers, and for their dedication to our future achievements.
On behalf of the Company, I would like to place on record our thanks to our two most important external stakeholder groups: our consumers and our shareholders. Both have put their trust in the quality of our operations and our products, and both expect the very best from us. The Company looks forward to continuing to meet and exceed their expectations in the years ahead.
The Consolidated Net Income for 2018 was SAR 2,009 million, as compared with SAR 2,182 million in 2017, with Net Revenue decreasing by 1.5% to reach SAR 13,723 million. With ongoing and successful cost optimization programmes in place, we have maintained profitability and robust market share across core categories.
Among the most important achievements of the year was the delivery of a turnaround for our Poultry and Infant Nutrition businesses. The former achieved profitability for the first time since its establishment, having broken even last year. Considerable efforts have been made to improve the performance of Poultry, through increased operating efficiencies and the exploration of new sales channels. Meanwhile, Infant Nutrition achieved its first ever EBIT break-even result, as it grows and develops towards a profitable future. Optimization initiatives for both businesses have borne fruit, and as we seek to occupy a more powerful market share in the Kingdom of Saudi Arabia and the GCC, we look forward to further success.
We operate in an increasingly competitive marketplace, so we have worked internally to centralize our strategic planning process, with decisions deriving from the information provided by our bespoke business intelligence unit. This has enabled us to establish the ‘Almarai biorhythm’, which brings together all planning and budgetary processes into an end-to-end integrated planning system. In this way, we can improve the performance monitoring and see which categories and markets are providing the most compelling growth opportunities, while the core objectives of the five year strategic plan are integrated throughout the annual budget and our monthly planning cycles.
Two important new launches were delivered in 2018. The first was our standalone Foodservice business, the introduction of which began in 2017. ‘Almarai Pro’ has been purpose-built to meet the requirements of the Middle East’s growing hotel, restaurant and catering (HORECA) market, as well as other wholesale customers such as schools and hospitals and we have introduced a number of products to service this segment. The Foodservice business has already shown strong growth and we regard it as a high-potential category for the future. Meanwhile, we introduced a new value range – Albashayer – to the market, for consumers prioritizing lower-price products. A number of new poultry and dairy products have been launched under the Albashayer value brand, with more to come in 2019.
The theme of this year’s Annual Report – ‘resilience through quality’ – demonstrates the institutional strength of Almarai as a business, and its ability to overcome the challenges that it faces. We are working in a macroeconomic environment that has provided headwinds, but our fundamental commitment to quality – from products and services, through to people and processes – has enabled us to maintain our strategic growth path.
The Almarai Continuous Excellence (ACE) Programme remains in place as we strive to enhance the processes and systems that are central to our daily activities. Meanwhile, our journey into Quality 4.0 was initiated in 2018, expanding our traditional quality model towards new horizons that will further entrench the promise of quality within our business model.
In line with both our own growth strategy and the Saudi national agenda as outlined by Vision 2030, we maintained our commitment to enhancing the quality of our workforce while directly contributing to the Kingdom’s socioeconomic development. Key initiatives for Saudi nationals, including the Dairy & Food Polytechnic (DFP), our Graduate Professional Training Programme and the Almarai Future Leaders Programme received increasing investment and support. These schemes are at the heart of our effort to build a workforce of the future, to develop and retain high-flying talents, and to create opportunities for professional Saudi nationals.
Meanwhile, we continued to focus on succession planning and leadership development as a core component of our five year strategic plan. As part of Project Horizon, which has been in place since 2016, we focus on internal talent selection and development to build a pool of successors who may be able to take over from today’s senior leaders.
In May, the Board of Directors confirmed that the Company is on track with Almarai 2025 – our long term strategy to reinforce our position as Middle East consumers’ preferred choice for food and beverage products. The latest five year strategic plan (2019-2023) continues to build on the infrastructure created – in terms of processes, people and systems – for the business to meet future challenges and achieve its long term objectives. Each of our five business units will drive growth and innovation across traditional trade, modern trade and foodservice channels, with an operating model transformed by the implementation of automation and digitization of manufacturing and distribution activities.
A focus on efficiency, cost optimization and sustainability measures will be maintained to ensure our competitive advantage, with continued strong capital investment in line with our long term investment cycle.
It remains for me to thank my colleagues at Almarai for the 15 rewarding years that I have spent at the Company, and to express my gratitude for your role in the achievements that we have delivered together. On behalf of the whole Company, I express my thanks to the Board of Directors and our shareholders for their support of our business and its objectives. I would, lastly, like to thank our loyal consumers, who I trust will continue to enjoy the nutritious products that we deliver to them every day.
While revenue growth in 2018 was subdued, mainly as a result of contraction in the market and demographic pressure, strong progress was made against the financial objectives of the Almarai 2025 long term strategy. Perhaps most importantly, and in response to a higher cost environment, the Company was successful in its cost optimization and efficiency program delivering a saving of approximately over SAR 200 million for the year ended 31 December 2018. A positive Free Cash Flow of SAR 1,217 million, was significantly influenced by a substantial feed stock build-up in preparation for 100% reliance on imported animal feed requirements – which we achieved in November.
Key achievements included the first EBIT break-even year for the Infant Nutrition business, and the first year of Net Income profitability for the Poultry business – both of which are evaluated in more detail in this report – which form key components of our long term strategy for turning under-performing segments. In July, we increased prices of six SKUs within the Dairy business unit ranging between 4% to 8% – the first such increase in over 10 years – to offset the impact of higher costs. This decision was made in order for Almarai to maintain the product and service quality that has always been our promise to consumers.
During 2018, Almarai’s performance was impacted by the adverse macro-economic conditions mainly originating from the VAT introduction causing more conservative consumer behavior and a significant disruption in the large Traditional Trade channel. Increases in labor and energy costs and the large reduction of the consumer base resulting from the expatriate exodus.
Beyond these external factors, full compliance with the new regulations on the importation of grain forage has had a direct effect on alfalfa importation costs and generated a one-off charge related to the closure of its arable activities in KSA of SAR 77 million. Also in its effort to resize its operations in Jordan, we had to recognize a one-off asset write-off of SAR 23 million. Finally, we had to record an asset write-down of SAR 27 million in other GCC countries.
In April, Almarai completed the acquisition of a controlling stake in Pure Breed Company, acquiring a further 14% of the share capital, giving the Company 55.9% of Pure Breed’s total share capital. Pure Breed’s operations are focused on poultry and grandparent farming. This acquisition will support our ongoing efforts to streamline, integrate and strengthen the Poultry supply chain. The transaction was fully financed by Operating Cash Flow.
In December, Almarai successfully completed the divestment of its participation in UFHC (United Farmers Holding Company), refocusing its sourcing feedstock strategy in North and South America.
In March, we announced the full repayment of our Second Sukuk Series III, for an amount of SAR 513 million. With the completion of this payment, the Sukuk which had been issued in 2013 is fully redeemed at par for the principal and profit of all Sukuk-holders. In addition, Almarai called and completely redeemed the SAR 1.7 billion Perpetual Senior Sukuk on its first call date of 30 September. These repayments were financed mostly by Operating Cash Flow as well as by existing credit facilities.
Future revenue growth will be driven by expansion in existing geographies such as Egypt, where we had a strong year in 2018, and new markets in the region. In addition, we will continue to better leverage our fixed assets as the current investment cycle closes, while improving the utilization of investments in non-GCC markets. Key targets in 2019 will be to realize profitability for the Infant Nutrition business, as well as for IDJ where so much good progress was made this year, particularly in Egypt.
Given persistently challenging economic conditions across the region, our focus on efficiency and cost optimization will maintain its place at the center of our plan for ensuring a continuous competitive advantage. In this respect, the most important components of our capital investment plan will be a focal point for the continual enhancement of existing infrastructure and assets – including manufacturing and farming facilities – to better leverage their capabilities and exploit efficiency opportunities. Meanwhile, innovation in technology, processes and products will drive further efficiencies and ensure maximum profitability across segments and markets.
Future investments will be financed through improving Operating Cash Flow, and when appropriate through banks, the Saudi Industrial Development Fund (SIDF), Agriculture Development Fund (ADF), European Bank for Reconstruction & Development (EBRD) and local and international Sukuk programmes.
While pressure on revenue and profitability exists, the Company’s traditional focus on innovative cost management and efficiency gains is undimmed. This continues to put us in a robust position when we seek to raise financing from the market, and we remain an attractive proposition to lenders and investors both at home and abroad.
Our strategy is designed to achieve a clearly defined set of goals by 2025, as outlined below. To deliver on this strategy, we have established where we will play, and how we will win.
Our Poultry business faced challenges in production and profitability. The key challenge was mortality rates, which led to lower bird performance and inconsistency in bird supply. This made it difficult for the ALYOUM brand to create and supply market demand, leading to underutilization of the supply chain from farming, processing and then into distribution. In turn, this led to a higher cost base that limited the business to high-margin channels.
Actions taken included safeguarding the wellbeing of the flocks by the development and implementation of a unique air filtration system in our broiler farms. In addition, enhanced nutrition, husbandry and vaccination programmes supported the health, well-being and performance of the birds. Through the centralization of sales and distribution with Almarai’s core business, along with the introduction of the Almarai Continuous Excellence (ACE) Programme in the processing facility, the business was able to increase its efficiencies and cost leadership.
Our business model is structured to deliver on the promise of ‘Quality you can trust’. It is tailored to our unwavering commitment to ongoing improvement and exists as a guiding force for team members across the Company. The business model enables management and staff to work in accordance with a clearly defined operating framework. It facilitates the practical application of a working culture that has efficient and effective process management at its core.