Greetings, everyone. This is Numan Khan. On behalf of SMB Capital, I would like to welcome you to an earnings call with Almarai's management regarding the company's Q2 2025 earnings results. Representing the management today are Mr. Danko Maras, the company's CFO, Mr. Ikram Ul-Haque, Head of Finance, Almarai Group, Mr. Abdulhadi Alamri, Head of Investor Relations. We'll first listen to the management feedback. Following this, we'll open the floor for the Q&A. Almarai's management, please begin your feedback.
Welcome to Almarai's second quarter 2025 earnings call. This is Abdulhadi Alamri, Head of Investor Relations at Almarai. I'm here with Almarai CFO, Mr. Danko Maras, and Ikram Ul-Haque, the company's Head of Finance. First, I would like to thank SMB Capital for organizing and hosting this call. Anton Alman Khan, our moderator. As usual, I assume that you will all have downloaded the Q2 2025 earnings presentation from our website. For those who haven't, please visit Almarai website. Under Corporate, you will find the Investor Relations button. Once you press Financial Information, you will see the earnings presentation as the last button on the right. In this folder, you will find the document.
Should we start?
Before we start our call, please pay attention to the disclaimer page. Now I will give the floor to Mr. Danko Maras.
Thank you very much. If we could go to the first page. Thank you. Good morning and good day and good afternoon to all of you, ladies and gentlemen. I am happy to be with you again for the Q2 results reporting. I would please ask the team to put back into the first page where I will talk a little bit about the market dynamics first, and then the business performance, and then the financial performance in the second quarter. Sorry for that little glitch there on the presentation. We have a little bit more information also on the appendix that you can look at. I think it might be helpful in reviewing the numbers. Let me get right into it and talk about our market dynamics. If we move to the page on the market share, thank you.
Here you can see. This is May month 2025. You can also see that our categories are either holding or growing shares in our market, and we remain number one in each of those markets. In each of those categories, it's great to see that we are holding position. Especially in some of the categories that I will go more into a little bit later on. Moving into our innovation pipeline. If we can go to the page on innovation, please. We are not. Sorry. Sorry for that glitch. Again, innovation pipeline, you see that we have key innovations in the quarter for our poultry business. Cooked chicken teriyaki, chicken butter, chicken barbecue, pepper yogurt flavors in poultry, good extensions that are selling very well. We have some extensions also in croissant butter and baked curry.
We added another exciting variant in our ice cream portfolio, Mini Bites Caramel, and it is selling very well. In addition to that, we are also launching a new umbrella brand that you can see there on the bottom. It is Yakut Evaporated Milk. It is something that represents young males and females passionate about cooking, taking pride in preparing delicious meals. This Yakut umbrella brand is going to be, we are going to add some additional components in, product offerings going forward. The start has been very well in this particular category. A joyful, good, young females, males, cooking umbrella brand that we have launched in the quarter. More to come on this for sure. If I can get some order in the slides here, please, we move to the business performance for Q2. Overall, looking at it.
How did we perform in the second quarter? There are a few points about Q1 and Q2 that I think are helpful for you, investor analysts to understand on Ramadan. We will also show you the first half year and go through the impact of our performance so far without having any of those comparator issues. Bear with me, we will come to that in a second. Growth, we have about 3% growth in the quarter, SAR 134 million. We are currently at SAR 5.288 billion in the second quarter. It is our highest ever quarter in the last, I think, 13 quarters that we have represented the quarters. Most of the growth, or almost all of the growth, is volume related. Even though it is a little bit less than what we saw in the first quarter, it is all essentially volume growth that you are seeing in the quarter.
Our operating profit increased with 3%, or SAR 20 million -SAR 813 million. That represents an EBIT margin of about 15.4%, which is equal to what we actually had last year as well. Our net income is elevating a little bit further. You see growth of our net income of 4% up to SAR 647 million. That's a SAR 27 million increase. It means that the net income margin that you're looking at in this quarter is 12.2% versus last year's 12%. Overall, solid performance on top line. The bottom line in terms of our growth components. Our working capital is increasing. You see there, it's about SAR 4 billion, y ou'll see that also in the first half year. We did a lot of activities of reducing our inventory. We had a special program last year. You see a balance slightly higher.
Most of that is actually credit sales that we did at the end of the period in our receivables. In addition to that, also, I do need to highlight that some of our ingredients, we are cautious and mindful that we have availability of supply given the geopolitical situation that has been happening to us in the surrounding area. Some of the ingredients might not be very large in quantities, but they are hard to get hold of or have a long lead time. We have been a bit more cautious in ensuring the most important thing for us is the availability of supply and that we are able to settle. We do not want to lose out on the specific ingredients. We have increased inventory a little bit because of the situation that we are in. It is not significant or material in bigger context.
We can manage the working capital overall. It seems that things have calmed down a little bit. We'll see how things are progressing over time. We're keeping a close eye on the situation around us. Our capital investment continues to increase. You see SAR 1 billion spent in the quarter. We've said full year that we will be north of SAR 4 billion. It is just following our capital investment plan that we've announced earlier. I'll speak more about that when we come to the first half year. The resultant free cash flow in the quarter is negative. From SAR 748 million last year, thanks to the working capital swing predominantly in CapEx, you see SAR 383 million in the quarter.
If I then move to the next page and start talking a little bit about the top line, you can see the revenue growth we have is SAR 134 million, or the 3% that I referred to. A lion's share of that growth comes, in KSA in absolute terms, SAR 103 million or 3%. You also see good growth coming from UAE, Kuwait, Jordan. Qatar has a very low base, so you see a lot of percentage movements, but we still have a way to go to get back to levels where we were in the past. Very positive to see the growth also in Qatar. If we look at Egypt, you see a negative growth in Egypt. I think it's important to highlight that underlying currency, we have significant growth. We have over 30% growth in Egypt.
As we translate this into hard currency or SAR, it's a - SAR 5 million. That continues also when we see the first half year. However, bottom line, we are managing that from a SAR point of view. They have low single-digit EBIT margins, so they are delivering good profits. It's just the effect that you see on the devaluation. Some pricing activities will also happen in that area. We will hopefully see some more growth also coming in SAR. Oman, we had a little glitch in the quarter that had to do with availability of supply, and we had a negative growth there, but there's nothing that we worry about. We have good profitability and good growth in Oman from previous year, and we will continue to focus and ensure that we will get that growth in that country. If we look at the categories.
Again, you see good delivery in the quarter, in particular on food and bakery. 12% growth on food, SAR 65 million is very good. Bakery also SAR 49 million or 8%. Long -life dairy produce also delivering good growth in the quarter. Poultry, the underlying volume growth in poultry is double digits. We have good volume growth in poultry. We have worked on supporting the brand and the positioning with trade support. It affects the gross to net. Therefore, we only see a benign growth on the revenue component. Underlying, the business is very healthy. We are selling what we can produce, even though we have this impact in net revenue. Fresh dairy is negative with SAR 31 million. That comes down to the shift of the Ramadan where we overall, when we look at the first half year, very good delivery of fresh dairy.
These are the effects of the Ramadan impact where most of our sales during Ramadan come within the fresh dairy segment. The negative growth is not worrying us at all. If we look at the first half year of season, it is very good delivery from fresh dairy. If we look at the channels, modern trade is growing significantly in the quarter. SAR 96 million and 8%. There is a lot of focus also here on the gross to net, making sure that we get return on our investments for the support that we are giving to the retail business. One or two of you have asked questions about if this is sustainable. Our focus is very much into making sure that we get the right returns for our activities in modern trade. Very happy to see this.
Much of it also comes from lower support or better optimization of our support structure to the activities that we do in modern trade. Traditional trade and food service are also delivering well in the quarter. The -SAR 39 million you see on export there is really related to farming, poultry farming, where we last year had a one-off benefit of selling some of our supplies to a third party. It is not really the underlying product sale. It is just our farming division that had a benefit last year that we do not have this year. All of this is also not significant in terms of margin contribution. In effect, it is actually accretive in terms of the mix when we look at it. That is countries, channels, and categories. If we go a little bit more further into the financial performance, now we are flicking the pages again.
Can you please go to the net income bridge? I give the word to Ikram to speak about the financial performance.
Thank you very much, Danko. Sorry, our laptop is playing today, so do apologize for that. Give me one second to get to the right page. Let me talk about how our income grew by 4% from SAR 620 million, that is the pillar you can see on the left-hand side, to SAR 647 million, which is the pillar on the right-hand side. There are five major key pillars which have allowed us to grow our income by 4%. The number one is about net pricing, which is negative, which is what Danko alluded to, mainly driven by the poultry area, which we have seen some discounting in the markets, followed by some discounting in the long life dairy.
We have not seen a change in the list pricing, but we have seen an increase in discounting, which is resulting in a SAR 56 million drop in net income on a relative quarter-to-quarter basis. Cost of goods sold has remained benign over the quarter. This is actually two things offsetting each other. We are seeing savings in our cost of goods sold driven by farming commodities, which is mainly soya, alfalfa. Those things are indeed coming down. This is getting offset by increase in the dairy commodities, which is butter, cheese, and related products. Overall, it is a small difference of SAR 10 million, which is negative. The very positive thing is the SAR 77 million growth driven by a very positive 6% volume growth for the full quarter. We are seeing a very robust volume growth in the economy.
That is the effect that is resulting in SAR 77 million of higher income for the quarter. The last two bars are small, but the effect is quite good. Operational cost is only SAR 9 million, slightly positive, but that shows our commitment to cost-cutting. I'll address that in the later pages, followed by SAR 7 million lower funding costs, which is driven by higher capitalization due to the poultry projects ongoing. This is how we go from SAR 620 million in Q2 2024 to Q2 2025 of SAR 647 million. Hopefully, my computer does not play. Let me try one slide. Okay, it worked. On this slide, we talk about the revenue growth, the operating profit, and the net income. Ladies and gentlemen, just remember three numbers. Almarai revenue went up by 3%, which Danko has talked in quite a lot of detail by channel, by country.
Because of the revenue growth of 3%, our operating profit also went up by 3%. This is despite having very high transportation costs for the quarter. That shows our commitment to making sure we run a very tight ship. Because of the growth in operating profit, net income also grew by 4%, which is mainly due to the higher capitalization of the interest cost that we are making. So three numbers: 3% top line, 3% operating profit growth, 4% net income growth. That is the key message for the Q2 for this line. If I do the same numbers by different segments, on this slide, I will discuss each segment one by one. If you look at the middle of the page, you look at dairy and juice, you will see the big plus 3% growth rate. Our top line grew by 3%.
Even though Ramadan was shifting by 10 days from Q2 to Q1. We had the impact of the EGP devaluation. That shows the strong growth that Danko talked about in foods and long -life dairy as well. The top line grew by 3%. When you look at the income growth, if you look at the bottom area, you see the red of - 1%. That is mainly driven by the lower economies of scale. Dairy is our big portion of our portfolio. As we are shifting profits or shifting revenue from quarter to quarter because of Ramadan, there is a slight impact on the profitability. We will discuss the half-year numbers, and you will see that the profitability is running very much in line with our expectation. Bakery growth top line is + 8%.
You can well imagine bakery is having a positive impact because of Ramadan phasing. People do not eat a lot of bread, as you can imagine, during Ramadan. Because of the phasing, just like we have a negative impact for dairy in Q2, we have a positive impact for bakery, + 8% growth rate for the quarter. Correspondingly, income is also growing by 8% because of our very high economies of scale. Poultry, as Danko talked about, we are running at full capacity. We are selling whatever we are producing. Because of this higher efficiency, the top line is remaining flat because of our full capacity utilization. The profit is also flat despite having higher transportation costs in this segment. That is the story for Q2 by business segment. Danko, if I can please request you to take us through t he highlight for the first half for Almarai.
Yeah, I'll see if I can try to speed it up a little bit. Again, you look at revenue, 4% growth in the first half year. We are now at SAR 11.055 billion. That is on top of 8% growth that we had last year in the first half year. We are growing top on top, essentially volume growth, SAR 442 million. We are very pleased with that growth number. We feel also confident about the ability to continue to drive that for the rest of the year. Our operating profit, again, growing SAR 26 million or 2%, somewhat muted because of the diesel cost that we have in there. At the same time, we are able to grow the profit through very disciplined cost control and initiatives to offset that elsewhere.
I think the business has done a good job in driving that. Efficiency improvement in, above all, labor and overhead costs that are there. Again, we elevate the net income to 5% growth, or SAR 66 million being at SAR 1.378 billion in the first half year. That comes essentially to, let's see here, that's a 12.5% net income margin versus last year, 12.4%. Holding the profitability levels in terms of margin percentages and in absolute terms, we are growing both top line and bottom line. The working capital is the same story, as I said before. It's the same balance because it's an ending balance. You see there that we're spending SAR 500 million more than last year. We're up to SAR 2 billion in the first half of the year. All part of the investment plans and the announcement we did on SAR 18 billion.
You'll see that. Doubling up m inimum for the rest of the year and probably also next year and the year to come is part of our investment. Approved investment plan that we are doing. Predominantly, those two components are affecting the free cash flow. If I move into countries again, if we can look at, again, KSA being the absolute highest delivery of SAR 375 million out of SAR 442 million, but also good growth. You see UAE, Kuwait, Jordan, Qatar growing nicely, Oman having this glitch from Q2 making a negative. The same story on Egypt, where we have 32% first half year growth in underlying currency. The same component of hard currency delivery on the EBIT is the same there with high -single EBIT margin. If we look at categories. You can also see g ood growth in fresh dairy.
Here's where I think we feel particularly good, growing 4% or SAR 153 million on fresh dairy. If we take out the Ramadan impact you had in the second quarter, you see that we are growing nicely in our core segment on fresh dairy. Also, very strong delivery on food with SAR 128 million or 8%, poultry SAR 59 million, bakery SAR 57 million, fruit juice SAR 34 million. Here on long -life dairy, I think I need to say that this category description includes the Egyptian impact on three categories: on long -life dairy, on fresh dairy, where we have yogurts and dessert in Egypt, and then on juice. I want to reassure everyone, if we look at long -life dairy, not including the devaluation impact in Egypt, it would be almost SAR 52 million. Long -life dairy, in particular in KSA, is doing very well.
Then on channels, you have a more conventional depiction of the traditional trade, given that it's our lion's share of our sales, SAR 249 million out of SAR 442 million. It's 4% growth, but even more in percentage term in modern trade. Given that it's a smaller slice of the proportion, it's SAR 119 million. Food service is doing well. The export, again, it's mostly the farming component that makes it benign in terms of the growth. If we then move in and maybe we can speed it up a little bit in summary, Ikram, for the net income.
Thank you. I'll go through it very fast. Ladies and gentlemen, the bridge is very similar to the second quarter that we just saw. I'll go through very quickly. Net pricing, again, this SAR 100 million discount is mainly driven by poultry segment, followed by long -life dairy.
As we talked earlier, cost of goods sold has remained pretty similar when we can see farming commodities offsetting dairy commodities gain. The best thing is what you see in the middle of the page, very strong volume-driven growth, 8% volume, driving SAR 220 million of extra profit to the bottom line. This is getting offset by SAR 66 million of higher operational cost, which is given the fact that the diesel price increase went up. It is a very good indication of tight cost controls. You see a lower funding cost driven by higher capitalization. If I go to the next slide, again, the story is 4% revenue growth, as we have talked in detail on earlier slides. Operating profit is 2%, mainly because of transportation cost. The net income is + 5%, mainly driven by higher capitalization. If I go through segment by segment.
We talked about the top line growth, which is 4% for dairy and juice, 5% for bakery, and poultry is + 3%. When you look at the net income growth at the bottom of the page, it's about 100 basis points to 200 basis points lower than the top line growth, mainly because of transportation cost, which is impacting each segment. That's the story of the first half for Almarai. Danko, if I can please request you to take us to the next slide.
On the balance sheet and our investments, again, coming back to the fact that we've announced SAR 18 billion of investment over the next five years. A lion's share of that is spent. It has been approved, but it will be spent this year, next year, and the beginning of 2027.
The increase that you'll see here is completely in line with what we are planning. We are not spending more, but it is a heavy investment that we are doing. We are managing this with our internally generated cash a nd we're actually quite happy with the progress. We are starting to see the beginning of the end on the poultry expansion, which has progressed very well. I think it's a big challenge to make sure the market works right and have yields that are very superior in the processing facilities and at the same time doubling the capacity by building new constructs. All of this is going according to the plan, and we're happy with that. If we look at the working capital, you can see that we are in percentage terms and not excessive at all.
We had an exceptional year in 2024 where we managed to reduce working capital, and it actually contributed significantly to our cash flow. If we go to the next page, you can see that. In 2024, you have SAR 6 billion of cash flow delivered with changes in working capital. Obviously, our improved profitability in the cash from the business was very good. In addition, we had favorable movements in working capital. Now we are a little bit more cautious, given the geopolitical situation. Overall, when we can pull the levers again and start working on driving more efficiency here, we will, of course, do that. We are, in percentage terms, somewhere around 20%-25%, t hat is where we have been also historically. Here you can just depict it. This is rolling 12 months. This is not the first half year.
You can see the OCF is SAR 5.8 billion. Working capital adverse movement SAR 600 million gives the free cash flow of SAR 500 million when we also are including the heavy investments we do in planned property, equipment, and then biological assets, etc. It is really SAR 500 million that you see there is the key. It is a question of neutralizing the net of loan time deposit funding cost and dividend. We do have an impact in the quarter on net debt, but you should remember also that we paid a dividend that came out in Q2. If we look at the metrics about our capital efficiency and our balance sheet structure, we are still suboptimal in terms of the leverage ratio that we talk about. We should be around 2.5x .
It's a positive problem to deal with, but essentially, you see it go up here because we are in this particular quarter paying SAR 1 billion in dividend. I should say also in relation to the PBIC acquisition that we've done, there is another SAR 1 billion that will be added to the net debt post -completion, which will bring the net debt EBITDA about 20 basis points up. At the same time, it will continue to generate cash in the business. We are confident that we can manage this level and even bring it further down as the business is generating the cash. On EBITDA and EBIT margin, this is again rolling 12 months and not the end of the period because we are at 15% EBIT margin, but the rolling 12 months is holding steady at 14% EBIT margin and 22%.
EBITDA margin for the rolling 12 within ending of Q2. Holding the ratios is important for us as we are driving growth. We do that with profitable growth at equal or higher profitability margins. Not too much to say about the debt maturity by age and type. More to come maybe later on that one, but it is fairly balanced. You see a lot of maturities over five years. That is deliberate, and we are keeping control of the structural debt. I will not say much about the debt portfolio that we are having. It is well balanced. We might do one or two things going forward, but more to come when we can disclose that. On dividend, not much to say except that the dividend ratio or the payout ratio has gone down to 43%. We say we should be somewhere between 40% and 60% of net income.
You can see for the last year, that's been where we have been. This is a Board of Director decision on what to pay or what not to pay. The capacity is there to pay. Okay. That was half an hour going through the results and, I'd say, the business performance. Overall, we are confident about the first half year. The second half year, we have good plans to grow, continue to grow. We look forward to seeing the capacity that came in, that will come in for poultry. I know that you read that we've done some pricing. I want to be very clear. There is no discussion around dairy pricing. What we have done is in bakery, effective in July onward. The good bakery performance you have seen so far is volume-related, in particular on the bread segment.
We have done some pricing activities. For bakery, that also gives us good comfort for the second half of the year. In addition to that, I also thought I would preempt a little bit questions that I am sure will come up regarding the acquisition of PBIC, the water business for Ival and Oska. First of all, I think we are very excited to move into this category. This acquisition aligns with Almarai's strategy to expand into adjacencies. If you remember, our number one top priority is to grow in core markets and core categories. Given our market share positions and where we are in our categories, we want to expand and diversify our portfolio and tap into our competitive advantage that we have as a business. We think this category is a very good fit to Almarai.
Even if Ival and Oska are very exciting and r eputable brands, we should remember they are fairly young in the market. They have grown over time very well. The acquisition is primarily asset-based because it allows us to secure a very modern production facility. Everything we will be acquiring is enabling us to have further innovations in this category. We see this as a long-term strategy play. If we look at their positioning today in the market, they are among the top 10 in the KSA market, which is a market valued at about SAR 12 billion-SAR 15 billion. It offers significant growth potential. We aim to be in market positions equal to where our current categories are in the long term. I would like to remind everyone that we are very happy with the speedy approval from the competition authority so that we are able to go ahead.
There are still some conditions in the completion of the deal that need s to take place. We are confident that it will happen in the near future. We will make a press release for the completion of the deal in the very near future. Prior to that, I do not want to get too much into any financials about the deal we've disclosed. Consideration price for the enterprise value. This is a long-term investment for us. We are very excited about what we can do in this category. We think we can tap into our strong customer relationships, our supply chain expertise, our engineering capabilities. There is a lot of synergy in maximizing value or driving shareholder value that we believe we can do. We are in here for the long run.
This is a very important strategic acquisition that allows us to expand our product portfolio offerings to the market. More to come on that when we can, I know I've received a lot of questions on financials, etc. We will come back to that when the time allows us to do so. Hopefully, that gives you good input to this. The deal is not completed, so please be aware of that. We are working rapaciously to make sure that all the conditions are met in the SPA that we have. Within the near future, we are hopeful that all of that will be resolved, and we will be announcing when the deal is complete. Thank you for listening in on this one. We open up for questions and answers, please.
Thank you, management, for the comprehensive feedback. Ladies and gentlemen, we will now start the Q&A session. If you wish to ask a question, please click on the raise hand icon on your webcast, or alternately, you can also type in your questions in the chat box as well. For the consideration of time, we will appreciate that if you can all limit your questions to one, that would be really appreciated. Our first question is coming from the line of Ms. Nada. Nada, we are unmuting you. If you can introduce your company as well.
Hi. Am I audible?
Yes, you are, Nada. Please go ahead.
Yeah. Thank you very much. So I'm Nada from JB Capital. So I have two questions from my end related to poultry. The first question is, how much of the negative net impact from pricing is related to poultry? How much was the volume sold for poultry in the second quarter?
Yeah. Essentially, if you talk quarters of the first half year, I would say a majority of the pricing that you see, we have a lot of ins and outs depending on subcategories within the categories, etc. A majority of this is poultry on the pricing. You were asking me— Sorry, what was the second question?
The volume sold related to poultry in the second quarter.
We do not normally disclose that, but to give you reassurance, it was very healthy volume growth. , it was almost 11%. When I am saying that the product offering is there and the consumers are buying our product, we see the growth coming. The category is also growing, but there is a fierce pricing and competition in the market currently.
We are making sure that our Allium Premium brand is priced above that level. At the same time, we follow a certain span to make sure that we do not become too disparate in terms of the pricing range or the price piano that you have in terms of the price offerings. We do activities to secure that the consumers are buying our product at a premium, but essentially, underlying when we look at the business, and if we think about it a little bit more longer term than the quarter, we are confident about the product offering we have. It is good quality that people can trust, and they buy our products if they are available on the shelf. We actually just sell what we can produce.
Okay. Fair enough. Just to elaborate on this, if I'm not mistaken, I have asked this question or someone asked this question in the previous call. So I have the volume in the last year was around. So if I'm applying 11%, so am I right that the volume sold around 70 million bird this quarter? Am I pretty close or?
You're pretty close. You're pretty close.
Okay.
Very good math.
Yeah. Okay. Fair enough. Thank you very much, gentlemen.
You're welcome.
Thank you, Nada. Our second question is coming from the line of Mr. Tahir Safiuddin. Tahir, if you can unmute yourself locally and introduce the company.
Taking my question. My first question, Danko, is really just. From a top-line perspective. I mean, 4% growth. I mean, are you happy with this growth? Because I mean, just feel that Almarai is behaving more like a mature, developed market type of FMCG player.
I think the question is really, what would take the company to grow faster? The reason I'm asking this is there's definitely a lot of moving parts. You've introduced a price increase in bakery. There's a poultry expansion coming through. There are some talks in the local newspapers about a dairy price increase. Maybe you can just help us triangulate all of these things together in terms of how should we think about the top-line growth. The second question, which really is related to that, is the EBIT margin today on a TTM basis is around 14%. You've mentioned before that you would ideally want to be closer to the 16% EBIT margin as a company. Again, how should we think about that trajectory?
I mean, knowing that diesel costs have increased and maybe they will continue to increase, I just want to get maybe your thoughts on how should we think about the margin trajectory, maybe 12, 18, 24 months down the line.
Yeah. Okay. Thank you, Tahir. Maybe we are a little bit a victim of our own success because this is the 15th quarter in a row where we have positive growth in our business. And you've seen some very stellar growth components where part of it had to do with the pricing activities we had to do to offset the inflation that was there in 2021, 2022. But then subsequent to that, we've had significant volume growth also coming and stagnated pricing or trying to hold the pricing. Overall, I think 4% in a quarter should not be looked at in isolation.
You have to look at how much are we growing year on year and are we having the right strategic move in the categories to drive that pricing. I think we are because even if you might feel that it's a bit benign with 4% on the first half year, we have a little bit of a planned backloaded year because of the poultry expansion plan. The facilities that we are finalizing are allowing us to produce more birds and sell more birds in the second half of the year. We haven't had that benefit coming through in the first half year, and it was intentional and planned accordingly. I think if you look at around all our categories, we are, I think, growing healthy for several quarters in a row.
If you look at it for two and a half years in a row, we have an ambition to continue to grow on that pace. That is why you also see us doing it both organically where we can, but also through acquisitions. Hopefully, with the completion of the deal structure, we will add another category. That is a very key component that we can continue to drive top-line growth profitably with adjacencies. Some of the initiatives that we have on the adjacencies, if it comes to ice cream, red meat, etc., it is all about growth. It is less about profitability because we have our solid brands and categories that contribute to it. It is about us being able to expand those new categories into growth territories where we feel we should be entitled to play in terms of size.
I think there is a lot of activities in our five-year plan or in our strategy when we look at it. Rest assured that growth is our number one priority. It is equally important that it's profitable growth. When you refer to that I said, 16% growth, I think you are not entirely quoting me right because I said between 14%-16% is where I think fast-moving consumer goods should have a return. In that range, we should be there. If you look at the quarter or even the first half year, we're at 15%. It's the rolling 12 months that makes it 14%. We tend to have, because of seasonality and the mix that we are having, that contributes less to the underlying EBIT in the second half of the year compared to the first half year.
So overall, I think being at 14% and growing is a good achievement. Of course, we want to grow our bottom line more, but within that range of 14%-16%, I think it's a reasonable request from an investor to get that kind of profit ratios on the top line.
Okay. All right. Very clear. Thank you.
Thank you, Tahir.
Thank you, management. Thank you, Tahir. Again, just to be wary of the time, we will ask everyone to keep your questions to two. Our next question is coming from the line of Mr. Patrick. Mr. Patrick, if you can unmute yourself locally and introduce the company. Patrick. Hi. Can you hear me?
Yes, we can hear you. We can hear you. Thanks a lot for the call. So basically, I think you have a SAR 44 million one-off through disposal of this investment in the associates. If we remove that, the numbers do not look that great. There is a 3% decline in the operating profit. The EBIT margin comes down to 14.5%. I just wanted to understand these initiatives of price hike which you are taking. Will it kind of offset the decline in the margins which we have seen in Q2 in terms, I mean, right through the gross level? On the poultry side, if you can just explain whether you are seeing some improvement in the pricing or, I mean, still there is an oversupply in the market and we should see the pricing pressure going to Q3 as well. That is my question. Thank you.
Yeah, it is an observant comment on the first part of the one-off. A company of our size, it is not unusual that we have one-off components.
In this particular case, it was a benefit that we had in the quarter. On the other hand, we also had a benefit last year in the quarter for a poultry subsidy that we received, the one-time benefit that you might recall. If I take out both of them, there's nothing wrong with the underlying profitability. I'm trying to avoid to explain one-offs as much as I can because I think the underlying business, and if it's doing healthy, is what investors want to hear. I don't want to refer to this. That's the point of me not mentioning it. In reality, the one-time benefit we had last year is equal to the one-time benefit we had this year. If I take both of them, our underlying profitability is still very healthy in terms of the growth that I see.
On the poultry one, I think that's a tricky one. It is very tough out there at the moment when I look at it. It's a contested, immature market. If we look at it strategically, it will settle down over time. The protein on poultry is something which is very healthy, considered very healthy. It's also driven in the Saudi vision of consuming more healthy proteins. Poultry is one of them, s eafood is another one. As the market starts maturing more and more, you will also see a price convergence, I believe. Like if you look at dairy today, there is one price. At the moment, there are, how should I put this, there are single poultry producers who do not have the benefit of a diversified product portfolio like Almarai that has to get volume.
You can see that being done by a ctivities which I think are not sustainable in the long run. If you want to be in the business in the long run, you have to work on the underlying components of the product offerings, making sure that the quality is right, and then ensuring that consumers are buying it. What makes me reassured is that the category continues to grow. It is a very healthy protein. There are a lot of players in the market that are competing at the moment. Every now and then, I see some pricing activities that are below the cost of producing. We do not want to go there. We see that our consumers are still buying our products even if we are priced a little bit above what is going on in the market. I do not think it will go away immediately. It will probably continue to be there.
Therefore, the metric for us to look at primarily, if we look at it strategically, is our underlying volume growing or not. We are very healthy in the underlying volume growth. We will have to wait this out. I think there will continue to be issues in the second half of the year and maybe also beginning of next year. In the long run, we see now we are actually not worried about it. It will mature. This market will become, like any other market, with, I think, adequate return requirements that are needed for this type of business.
All right. Thanks a lot.
You're welcome.
Thank you, Patrick. Now we'll be taking some of the questions from the Q&A chat box as well. I will be merging a few of the questions just to be wary of the time.
There are a couple of questions about the gross profit and the gross margin that has declined from in Q2 versus Q2 last year. Could you clarify what specific cost factor contributed to the decline in the profit as well as the margins?
Yeah. In simple terms, I think there are 60 basis points of deterioration that you see in the gross margin, both in the quarter and year to date. That could be easily a reference to the point that Ikram was making about we see raw material for feed stock coming down, but ingredients are continuously high. If we look at butter, for instance, and the price for butter, unfortunately, we have a negative impact on ingredients components to the dairy food category that affects us. Not significantly, but it does affect us. The other thing is mix. Pricing.
If we look at our categories, very different average sales prices. In the poultry segment, we had a higher proportion of frozen poultry sold than fresh poultry that is on a different price level. When I say mix issues, these are essentially points that go up and down depending on the performance of the quarter. Those are the two key reasons. I do not know if you want to add anything to that, Ikram.
That is the transportation cost, which does impact our gross profit quite significantly. That is also resulting in the reduction that we have seen from the 1st of January.
We made an announcement earlier in the year of an impact of about SAR 200 million full year. We have about close to half of that already now in the first half of the year.
I think maybe it is good to look at the total P&L when you come down to the EBIT margins or the net income margins because we are offsetting a lot of that, not necessarily in the right line items when you look at the P&L. It can go to indirects or below gross profit. A lot of good initiatives are being made, c onsidering that, we do need to take into account that diesel costs might continue to increase in the future. That means we are doing a lot of work on cost-benefit analysis of alternative sourcing on energy. Some of those activities we have implemented, some of them are more long-term. I think it is wise for everyone to look at alternative energy sources because we are expecting that to continue to be a cost item that goes up. That is not only affecting Almarai.
It's affecting us all one way or another. We are pleased to see the mitigating effects, but you won't necessarily see all of it coming through in the gross margin.
Thank you, management, on this. There are a couple of questions related to other income. I will clap all of those in together as well. The question is that there seems to be a one-off gain of SAR 43 million related to sales of investment in associates in Q2, excluding which net income would be lower, operating expense also higher. Is that understanding correct?
Yeah. It comes back to what I mentioned before on the question about the one-offs. We had a benefit this year, but we also had a benefit last year. Overall, they too are in the same level. If we take them out, the underlying performance is still improving. I did not want to make references to one-offs. I know that it is not particularly appreciated, but that is the reality of it. We had a fairly low one-time subsidy that we received last year. Now we had another that gives the credit to the P&L. Without them, the underlying performance is still doing very well.
Management, there are a couple of questions related to the acquisition of Pure Beverages . If you wish to take the questions, I will pass it on. Otherwise, I will be skipping them.
Pure Beverage Industry Co. management? I believe that was addressed by Danko already when we finished the Q&A. Sorry, Danko. Please go ahead.
No, I do not know the question. Please, if you want to ask something, if I have not already answered it.
Post the acquisition of Pure Beverages , will the beverage portfolio be positioned as a primary premium offering? Also, how much revenue contribution is expected from this category?
Yeah. As I was saying, I do not want to go into specifics on numbers, but the 12 billion-15 billion water market is a big market. We also know that in our line of business, people need to eat and drink. We think it is a very stable category. If we do it right, it comes down to what I think goes back into the Almarai product offering that makes us unique in the market. It is quality you can trust. It is equally important in poultry, in fresh dairy, as it will be in water. I think the company, PBIC, have done a really fine job in building the foundation for that. We will take it even further on that, in that line of product offering.
If you get the consumers to prefer our brands, which I'm sure they will, in the long run you will see a preference for consumptions with our brands. That, of course, also will be reflected in the pricing.
Thank you, management. Again, there is a question related to revenues from the other activity segment declined in Q2 at 25% compared to the same cost last year. What are the reasons behind the decline?
Yeah, and that's, again, I think I answered in the beginning where you saw that we, again, had this one-off very large sale of corn and soy to a third party last year. It's essentially poultry farming, whereby you don't have it this year. You have this anomaly where you have a negative component to last year, but it's a comparator issue. These items are not products.
These are raw material with a very different margin. So it's not really affecting our profitability at all. In fact, it's enhancing our margin. It's accretive because of the overall mix of selling these products are not there this year. So overall. This is a farming-related item from last year. Hopefully, that's well enough explained for you.
Thank you, management. Modern trade grew 8% in Q2 2025, up from 2% in Q1. However, it stood at the same level in the last few quarters. Can we expect a similar growth trend in the coming quarters? Also, how does this channel impact margins across different product categories?
Yeah. So I think I also mentioned this in the beginning, so I won't be long on that. But modern trade is very important for us. And we also need to balance the different desires between our different channels. Traditional trade, we have an extremely good coverage of traditional trade. It is very, very important for us. It is also important for us to focus on modern trade. It is a very different type of channel where you work a lot with retailers on what we call gross to net. The support that we give to modern trade is to get return on investments for the activities that we do in modern trade. What we have done this year is more focus on the support that we give between gross and net. We are very pleased to see that we are growing in modern trade. It is a key channel, as you all will agree on. We will continue to focus on that to continue to have more growth in modern trade. Part of that relates to also making more profitable growth in modern trade.
That is where I don't want to give any predictions for the future, but it's a key focus area for us. For those of you who also operate or do analysis outside, let's say, the region, you know that this is a very tough area in Europe or in the U.S. It's important for us to have good partnership with key retailers and making sure that we win with winning customers by getting a return on the support that we give. Modern trade is key. We have more focus on the support that we give that actually allows us to get more growth within our segment, but also for the retailer themselves with the product offerings that we have in place.
Thank you, Danko. There are a couple of more questions regarding the net pricing impact on Q1 and Q2. I believe that you have already explained that quite a lot related to poultry segment. I will be skipping on those questions. There are questions coming from Abdulaziz on Egypt, 30% underlying local currency growth. Can you please elaborate how much comes from pricing and how much is from the volume?
Maybe you can help me here, Ikram, but I believe almost everything is volume.
I think you're spot on. Most of it is driven by local volume. There is some reduction in export volume, but the local currency, local growth, and the market share in the local currency remains very robust. We are very positive on the Egypt future going forward as well.
There is a question from Mr. Adman. What is the volume growth in H1 2025? Ikram mentioned 6% for Q2. Maybe I missed the H1 number.
Did you ask him?
It was about. Volume growth.
Volume growth for Almarai?
Yes. It is around 8% for the first half. In totality. Thank you.
There are questions about poultry pricing, specifically in the second half. Again, we will skip on that as well, given the management has already talked about it as well. What is the expected impact, the price increase in bakery segment in SAR terms? If you can elaborate on that.
Yeah. Overall impact, if we look at the bakery price increase that we are doing now. Some of the price increase that we do, we will use to support the brands as well because we want to have more growth in volume for the bakery segment. We are mindful about the implications, sometimes the correlation between price and volumes. You have to be mindful around it.
Approximately SAR 150 million is what we are seeing, SAR 150 million-SAR 200 million on an annualized basis is the impact that we have on bakery.
Thank you. There is a question that is coming from Mr. Anigul Marbat. What will be the impact on poultry segment from recent ruling on baqalas not being able to sell meat, given the company's reliance on traditional trade for a major portion of their sales?
Yeah. I think this is also something we looked into. I think the restriction lies on baqalas that have a square meter less than 24 sqm . It really does not impact us materially in any way or form because of the restriction being to very, very small baqalas. If you read the fine print of what is actually being introduced there, you will see that it really is trying to aim towards the very, very small.
Bacalas that have a space smaller than an office room if you're in my position. But then, essentially, we monitor that. But it's not any major impact for us.
Thank you. As we are already over time, we will just be taking last two questions from verbal questions. And I will advise or ask the questions to keep it at one. Ms. Dua, I'm unmuting. If you can unmute, if you can introduce your company as well.
Hi. Am I audible?
Yes, you are.
Hi. Just a quick question on the bakery price hike. So assuming commodity prices remain at current levels and nothing changes, and assuming, as you just mentioned, Mr. Danko, that the impact will be SAR 150 million-SAR 200 million on an annualized basis, should we assume that second-half margins will be better? Because it will almost offset diesel cost.
Because you have a lot of variables in this, there are reasons to why we do price increases. Some of the components that are yielding the additional revenue and profit are also going to be reinvested. You will not see a like-for-like comparison if we look at the total Almarai performance. We use the means to drive the category further for a long-term perspective. When I make this statement, it is pure sort of math of doing calculations. We do not want to lose volume because of that. A lot of investments will be made also to support it. There are many other means for us to mitigate the diesel cost. A company of our size always has efficiency programs to drive and make our cost structure even more lean and efficient.
We have a lot of initiatives in place to drive them, and very good ones too, that really energizes not only me as a CFO, but as a business. The focus is really good. We have a lot of levers to drive profitability to offset the diesel. You should see pricing in bakery as something we do to invest in bakery, to drive growth in bakery even further.
In other words, we should not assume improving margins for the second half?
I would not. I mean, if you want to squeeze it into an Excel sheet, I would not do that because there are different variables that come into play. Hopefully, through the quarterly announcements, you will see what we will do. We are confident about our growth plans for the second half of the year. When I talked about being backloaded.
In terms of our plans, a lot of it has to do with poultry. You look at the category play and what we will do. We are ambitious in the second half of the year to make another record year in Almarai. If everything works the right way, that's exactly where we are heading.
Okay. Very clear. Thank you so much.
Thank you.
Thank you. Just to remain mindful of the time, we'll be taking our last question that is coming from the lines of Mr. Igney or Ms. Igney. Apologies if I mispronounce your name. If you can unmute yourself and introduce the company.
Jai Capital. My question is about the subsidies that you received in the first half of this year, whether for the dairy or for the poultry segment. Thank you.
Yeah. Maybe Ikram [audio distortion] .
Sure, Danko. Subsidies we received are slightly lower than last year. That is mainly because the dairy subsidy is coming in play. No issues on that. As Danko mentioned, we did receive a one-off subsidy last year. Like on like, we are about, I would say, SAR 30 million-SAR 40 million lower on subsidies received for the first half versus the same period for last year. The program continues as is. We are seeing no disruption on the dairy front. Poultry subsidy remains very limited. It is still continuing in the current year.
Can you give us an estimated figure for the amount that you received in the first half?
We do not disclose that. This is only disclosed on an annualized basis. You can see in our annual report that we do disclose it. I think the more critical point is to understand the difference from year to year. This is done on a uniform basis. If we are receiving Almarai, let's say, close to SAR 330 million of subsidy, it will be fairly uniform for each quarter because it follows an accrual methodology. In that respect, Almarai recognized between SAR 60 million-SAR 70 million each quarter. That is fairly uniform, except for poultry subsidy, which is very sporadic. You only receive when you receive in cash, which is a small percentage only.
I think the overall bigger picture should be that subsidies are, of course, good to get. In reality, we are not in the need of the subsidies in that respect. If you look at our underlying profit as Almarai, the subsidies are a very small part of that. It becomes much more relevant, maybe, if you look at smaller players who are just in one segment. If it, for instance, is in poultry and who are perhaps not having the benefit of the size of Almarai, then it becomes very, very relevant. In our case, a perfect market with free pricing and no subsidies is essentially ideal. Of course, we are grateful for subsidies that we do receive. It does not materially impact our underlying profitability if I look at it.
Okay. Great. Thanks so much.
Yeah. I saw that we were up to about 162 attendances. Thank you very much for calling in and having such an interest. Maybe we will extend the period if we see the same level of interest in the future. Please do not hesitate to connect with investor relations on questions you might have.
We have a good department there that allows you to get more clarity on questions that you might have that you feel were unanswered this time. Please feel free to reach out to our investor relations department for more answers to questions you might have.
Thank you, management. With this, we will close the call. SMB Capital would like to thank Almarai's management for taking the time to conduct this call. We would also like to thank all the participants for attending. We wish you a pleasant day. You all may disconnect now.
Yeah. By the way, I wish you all a good holiday and looking forward to seeing you all in our third-quarter results announcements that will come in October. Thank you, everyone, and goodbye.