Afternoon, everyone. This is Fahad Irfan from sell-side research at Aljazira Capital. On behalf of Aljazira Capital, it is my pleasure to welcome you all to Almarai's earnings call for Q2 2026. I am pleased to welcome our panelists on the call today. Among our panelists, we have Mr. Ikram Ulhaque, the CFO, Mr. Abdulhadi Alamri, Head of Investor Relations, Governance and Compliance. We will start the call with the management before opening the floor to participants for the Q&A session. I will start by handing over to the Head of Investor Relations, Mr. Abdulhadi. Mr. Abdulhadi, the mic is yours.
Thank you, Irfan. Welcome to Almarai's second quarter 2026 earnings call. This is Abdulhadi Alamri, Head of Investor Relations, joined today by our CFO, Mr. Ikram Ulhaque. I would like to thank Aljazira Capital for organizing and hosting today's call, and our moderator, Mr. Fahad Irfan. A copy of the Q2 2026 earnings presentation is available on Almarai website under Corporate Investor Relations. Before we begin, please take a moment to review the disclaimer. With that, I will hand over to our CFO, Mr. Ikram Ulhaque, to take us through the presentation.
Abdulhadi, good day and good afternoon to everyone from around the globe. My name is Ikram Ulhaque, and I'm very excited and honored to host the earnings call as Almarai CFO for the first time. In my new role, I look forward to discuss operational as well as strategic insights for Almarai. This is even more critical for the current quarter, which was quite challenging given existing geopolitical situation. Without any further delay, let me start with the market share position for the quarter, and let's move directly to slide five. As you can see on the slide, Almarai remains number one across multiple categories and have indeed gained market share in juice, bakery, and poultry. Dairy market share has remained stable, but the food market share is temporarily down, driven by SKU and channel rationalization, which I'll discuss more later in the presentation.
If we can go to the next slide, it is slide six. Innovation remains central to our growth agenda, and this quarter was no exception. This quarter, we expanded our portfolio across several categories, and let me take some time to go through them in a bit of detail. If you look in the left-hand side, you look at the new SKUs for seafood category. You see new variety and flavors for Norwegian salmon filet. In addition, you will see new type of fish other than salmon, which were launched, which are the Mediterranean sea bass. This is indeed very exciting for the seafood category, and you will see further product expansion on similar dimension. Next is ice cream. On top of the screen, you will see three new SKUs which were launched.
With these innovations and the 45-degree temperature, I am happy to say that we are gaining nearly 60% growth in the ice cream category. On the right-hand side, you will see the new muscle and Protein Milk also launched this summer. There are two points which I want to address before we move on from this slide. The first is that the new innovation highlight the changing preference of the GCC consumer. You will see a lot more focus on protein and indulgence, especially on-the-go consumption. We expect this trend to continue, and our innovation will focus more on these dimensions going forward. Secondly, as a finance person, it is very heartening to see that these innovations are all margin accretive. It is another dimension which will allow us to make improved returns over the long term.
Let me now move to business performance section, and I will go directly to slide number eight. Thank you very much. This page summarizes the Q2 on six simple graphs. Let me start first with the revenue on the top left-hand side. Revenue grew by a very strong 11% to SAR 5.9 billion, an increase of nearly SAR 580 million driven by three major factors. The first is the capacity-led volume growth of nearly 20% in poultry. Second is the continuation of excellent operational performance in Egypt, resulting in nearly 31% growth in dollar terms on ground. And third is the inclusion of the water business. I will discuss these factors, among other contributing factors, in detail in the next three slides. Let me now move on to the operating profit section.
If you look at the operating profit section, it is SAR 814 million for the quarter, and despite strong revenue growth, the operating profit was steady at SAR 814 million due to multiple headwinds. Similar to the three drivers for revenue growth, there were three major headwinds facing Almarai. The first is the commodity cost increase driven by transportation cost in the region. Second is the ramp-up cost for the new categories, mainly poultry. And third is the energy inflation cost, which is impacting domestic transportation and electricity cost. Net income came in at SAR 636 million, broadly in line with last year, mainly due to higher funding costs driven by higher debt balance on a year-on-year basis. Let me now move to balance sheet section, which is the bottom of the page.
Again, starting from the left-hand side, looking at working capital of SAR 4.8 billion, which grew by around SAR 700 million. This is mainly because of our inventory cover growth, given current geopolitical situation. To give you some perspective, our dairy commodities, mainly corn and soya, their cover has increased from four months to nearly six months to manage any unexpected event. In addition, the higher cost of alfalfa is also getting recorded on the balance sheet and is reflected in the higher inventory balance. Moving on to the next graph of CapEx. You see CapEx is SAR 879 million, nearly SAR 122 million lower than last year, and very consistent with our long-term investment plan. I will discuss CapEx more when I discuss the first half performance.
Lastly, the free cash flow, which was positive at SAR 42 million, and it is lower than last year only due to strategic buildup of inventory, as we discussed earlier. Let me now move to the next three slides, where we will discuss revenue on three dimensions of country, product, and channel. Let me now go through the country dimension first, where you will see Almarai grew revenue by SAR 580 million and where this growth came from. The very first, as you can see on top of the screen, is KSA, which is more than nearly half of the total growth. 8% growth on a like-on-like basis, but nearly 50% of the total growth, mainly driven by poultry. Next in line is Egypt. As I talked earlier, we saw very strong growth on all three product categories of yogurt, long-life dairy, and juice within Egypt.
Going below, Kuwait and Qatar growth rate was mainly driven by poultry, whereas Jordan growth rate was driven mainly by dairy. Gulf countries' growth rate was subdued, mainly due to the conflict. If you go to the next page, where we can see the product categories. As discussed earlier, protein, 16% growth rate, driven by very healthy volume, which Abdulhadi will discuss later on in financial section. I am very glad to report that we sold 88 million birds in the current quarter. This is nearly 20% up on the same quarter last year, where we sold 73 million birds in Q2 2025. You can see later on, the biggest contribution is coming from water, followed on by long-life dairy. I do want to talk about long-life dairy in a bit more detail. This is driven mainly by the growth in Egypt.
If you look at the long-life dairy growth within GCC countries, the growth is 6% on a like-on-like basis. Let us move on to the third dimension, where we talk channels. You can see it is a broad-based growth rate across the board. The main issue there, you see the food service, which is growing at 13%. That is mainly because of poultry sales within that channel. Modern trade is slightly below the average, which is mainly driven by the food rationalization within that channel. Export growth rate is driven by a lower base from last year. I will now move to finance section, and I will go through the income bridge before handing on to Abdulhadi. So if we can go to slide 13. Excellent. Okay. The bridge explains the movement in net income from SAR 647 million last year to SAR 636 million in the current year.
I will talk about these six vectors that you can see on the slide, and I will discuss them one by one. The first vector is net pricing. Nearly half of the price increase that you see in Q2 is coming from the annualization of the revenue alignment done on various bakery SKUs in Q3 last year. The balance is mainly driven by dairy, followed by food SKUs. The second vector where we see the cost of goods sold, the SAR 56 million increase in cost. This is mainly coming from dairy commodities, mainly corn and soya, and packaging cost. This is resulting the major costs for the current quarter. We have incurred higher cash costs for alfalfa in the quarter, but majority of this cost impact is deferred to later quarters due to high inventory cover in alfalfa.
The third pillar is the volume growth factor, which is mainly driven by poultry and Egypt, resulting in SAR 44 million gain. As discussed earlier, higher distribution, energy, and ramp-up cost resulted in SAR 66 million of higher operational costs on a quarter-on-quarter basis. Funding cost reflects the higher level of borrowing on a year-on-year basis. Lastly, I want to talk a bit more on that vector, which is a one-off item. Last year, Almarai had a one-off gain of SAR 44 million due to reversal of Romania impairment. Adjusted for this gain, the underlying net profit growth is +5% instead of the reported -2%. I don't like to discuss adjusting events. However, it is key for me to address this point to appreciate the underlying trends and to be able to forecast future quarters for our listeners.
With that, I'll pass on to Abdulhadi to take us through the rest of the financial section.
Thank you, Ikram. We've covered this in the previous slides. We go into the segment performance. Now we look at the segment performance for the second quarter of 2026. We start with dairy and juice, and we see healthy growth of 6% to SAR 3.7 billion. This is driven by healthy consumer demand and volume growth. The second category is bakery, which grew at 8% to SAR 747 million, and this is driven by an improved revenue mix. Protein grew double digit by 16%, driven by volume growth coming in from the expansion projects. Now we look at the net profit margin. We start with dairy and juice, which saw a stabilized net profit margin at 10%. This is pressured by dairy commodities costs and energy costs coming from diesel and electricity expenses.
Bakery grew 16%, driven by the improved revenue mix mentioned earlier. Protein grew at 12%, which compared to Q1, went up by 1%. This is driven by volume growth coming in from the expansion projects. In Q4 2025, the quarterly production of poultry was 80 million birds. In Q1 2026, it was also 80 million birds. However, in Q2 2026, it went up to 88 million birds. The current run rate is 350 million birds, and this increase in run rate will result in improved revenue and profit performance in the coming quarters. Now back to Ikram.
Shukran, Abdulhadi. Let us now go through the first half section. We'll go through it quickly given that we just discussed Q2 in detail. Similar format, looking on slide 17 for the first half. Looking at the revenue on the top left-hand side, 9% growth rate. Again, remember those three vectors, poultry, Egypt, and water. They're the main contributors. I'll discuss them more in the later section. Operating profit was stable at SAR 1.7 billion and net income at SAR 1.4 billion, broadly in line with the prior year.
These results were achieved despite having the headwinds from higher landed cost of commodities, energy inflation, and ramp-up cost of new businesses. On the balance sheet, working capital is up by SAR 700 million due to higher inventory, as we talked before. Capital expenditure reduced to SAR 1.8 billion, which is at halfway mark of the year, we are lower than SAR 2 billion.
You can analyze the number. You'll get SAR 3.7 billion-SAR 3.8 billion. I expect that despite seasonal spend, we should finish the year 2026 at or around SAR 4 billion. This will result in lower CapEx year-on-year of nearly SAR 400 million. It will contribute very positive towards free cash flow generation. I will talk more on that later on. Free cash flow of SAR 250 million for the first half is aligned with last year, despite having higher inventory cover. Let me go through the revenue dimension by country, product and channel for the first half. It's the same story when you look at the first half. Growth of SAR 973 million or nearly SAR 1 billion. More than half, SAR 567 million, is coming from Saudi Arabia driven by poultry growth rate.
Egypt is not far behind with SAR 200 million, followed by other Gulf countries. The only softer growth is in Oman, which is mainly due to lower operational performance in Q1. If you go to next page, we're looking at again, the growth of SAR 973 million. Again, protein, just like Q2, has the highest share of growth of nearly one quarter, followed by water, which is the inorganic growth rate, followed by fresh dairy and long life dairy. The only softer growth was the food category for the first half, primarily due to the intense competition among major players in Q2 and internal SKU and channel rationalization. If you go by channel, it's a broad-based growth across the board, as you can see. If you look at export, the growth is slightly higher because of the base effect from last year.
With that, I'll request Abdulhadi to take us through the financial performance for the first half.
Thank you, Ikram. Now I will go over the net income bridge for the first half of 2026. We start with net pricing impact, and we see a SAR 96 million impact coming in, with almost half coming from bakery and the other half coming from other product categories. The second item is cost of goods sold. It's coming in at a SAR -40 million, and this is driven by the dairy commodities cost.
The next column is the volume mix, and we see SAR 151 million coming from the poultry volume growth related to the expansion projects and volume growth in Egypt. If we look at the operational cost at SAR -162 million, this is driven by two items. The first one is the energy cost, driven by the diesel cost and the increase in electricity cost. The second item is the ramp-up cost from the poultry expansion projects.
For funding cost, this comes from the debt raised for the acquisition of the water business. Finally, in the last column, which is the SAR 44 million, we see the one-off gain on sale of Romania operations back in 2025. If we adjust for the one-off item, the net profit growth would be +3% instead of -1%, which shows a healthy underlying business performance. We've covered this slide in previous slides. We go into the segment performance, and we look at the segment performance for the first half of 2026. We start with dairy and juice, and we see healthy growth of 5% to SAR 7.9 billion. This is driven by healthy consumer demand and growth in GCC and Egypt. We go to the second item, bakery, which grew at 6% to SAR 1.4 billion, and this is driven by an improved revenue mix.
Poultry grew double digits at 12% to SAR 2.26 billion, and this is driven by the volume growth coming in from the poultry expansion projects. We look at net profit margin by segment, and we see dairy stabilizing at 12%, notwithstanding the increase in cost pressures coming in from dairy commodities cost and energy cost driven by diesel and electricity expenses. Bakery improved to 16%, driven by the improved revenue mix mentioned earlier, and protein came in at SAR 241 million, with a very healthy 11% net profit margin. Now back to Ikram.
Thank you, Abdulhadi. Let me now take you through the balance sheet and cash flow ratios. If you go to slide 26, thank you. You can see, and I'm very pleased to see, that we've seen the peak of the investment cycle. You can see CapEx is now down to 18% as a percentage of revenue. It shows that we passed the peak in this investment cycle, and the trailing 12-month CapEx is SAR 4.1 billion. With two more quarters to go, I'm confident to say that we will see a three in front of this number instead of four. This will add very positive to the cash flows. If you go to next slide, where we see the working capital, the two percentage point increase is purely driven by inventory, as we've discussed earlier, because of geopolitical situation.
The same rationale goes for operating cash flow on slide 28, where the underlying cash flow remains good, but because of the investment in inventory working capital, the ratio looks lower. If you go to slide 29, where we discussed the trailing 12 months or the cash flow bridge, see the first green bar of SAR 5.8 billion remains resiliently and very strong. The working capital is down SAR 0.5 billion, driven by inventory, as we just talked about. What we will see, the ICF, the investment cash flow, the SAR 5.8 billion, we expect this number to come down every quarter by at least SAR 100 million as we bound down the CapEx cycle. By end of the year 2026, we expect free cash flow to be significantly positive.
The reason is the water acquisition will be behind us, and the underlying free cash flow will improve with normalized inventory levels and lower CapEx. The group maintains very strong liquidity with available lines of credit at SAR 6.3 billion, is now increasingly focused on realizing returns from our SAR 18 billion CapEx investment in the past. If you go next slide, where we discuss the key ratios on slide 30. On the left-hand side, the net debt. The net debt trend is seasonally higher, as it happens every year when Almarai pays its annual dividend in Q2. We expect the ratio from 2.7x to reach 2.5x by December. We achieve this 20 basis point improvement every year after we pay the full dividend in Q2, and we are confident on that front.
On the right-hand side, the EBIT margins are at 13% and EBITDA margins at 21%, which is lower than the previous run rate. This trend emerged in the first half of year 2026, where Almarai operating profit growth was limited due to commodity transportation costs and energy inflation cost. With corrective actions taken in late Q2, we expect these ratios to improve in the next coming quarters. Next is our debt maturity profile. Almarai has already arranged for the next one year of funding availability, and all the rollover provisions have already been done. On the DCM front, Almarai is reasonably comfortable, and our average debt tenure remains at six year plus. Next slide is cash dividend.
Almarai just paid its highest dividend ever in Q2, which is now visible on the screen, and hopefully it's also visible in our shareholder bank account and our viewers' bank accounts as well. With that, let me take you to the last slide before we open for Q&A. What are the key things that we can take away from this presentation? The number one message for us is that consumer demand remained resilient even without being the Iran conflict ongoing for the full quarter. In fact, we saw softness coming in from Gulf countries, but in the last few weeks, we are seeing strong results coming in from lower Gulf countries as well. That's a very healthy sign that shows the strength of the consumer on the ground, and it's very good for us. Second is what Almarai did in this market environment.
Almarai delivered double-digit revenue growth. It was positive on all countries, products, and channels, which is remarkable given the current situation. The poultry and Egypt were the spearheads, but across the board, everybody contributed, and that matters a lot. The third point is supply chain disruptions. We are arranging higher cover, as we talked about, but the cost of this higher cover is affecting our P&L. It is a persistent challenge, and we hope the war comes to an end soon, but that is something that we're already planning for it and taking corrective action. Our investment in inventory is mainly for risk mitigation, as we talked earlier. Lastly, I want to talk about the CapEx program, and very good to see that we are now seeing the top of the investment cycle, and it's tapering down, having passed its peak.
Most of these projects that are sitting in the balance sheet will become operational over the next few quarters. Almarai and its shareholders will be able to reap the rewards for this prior CapEx investment. Some examples, as you've seen already, is the poultry category expansion. It could be entry in the red meat, as announced earlier, or new product launches in the seafood, as discussed earlier. With that said, we've come to the end of the presentation. We'll open the floor for any Q&As.
Thank you, Mr. Ikram and Mr. Abdulhadi. Ladies and gentlemen, we will now commence with the Q&A session. You may raise your hand to speak with our panelists by pressing the hand icon on your screen, or alternatively, drop your question onto the Q&A chat box. With that being said, we will, however, prioritize raised hands. Please limit your questions to two at a time so we may get to all participants. However, you're welcome to join the back of the queue if you have a follow-up. Without further ado, I'll open the Q&A session. Our first question comes from the line of Mr. Abdullah Al Buraidi. Mr. Abdullah, your line is unmuted. Please unmute yourself locally and go ahead with your question.
Hello. Thank you very much for the great presentation and congrats for the very great result. I have a question regarding the month of June results for the dairy segment specifically. As we know, the price increase in Saudi took place late May, and we're having the result for the full quarter. We would like to understand how the June segment looked like in order to see the real impact of the price increase on results.
Abdullah, as you rightly said, the increase was done in late May. It was done before Eid. Once you take, let's say, the seven or 10 days of Eid into consideration, we virtually only had one third of the quarter where the price increase was visible. Whenever the price increase is done, it usually take between three to four weeks to come to a normalized view. I have to say, what we have seen, that demand continues to be very strong. We have not seen a reduction in demand on a significant level. There was a slight softness, but nothing material. Much better than all of our price increase in the last 20 years, I would say. We are very confident, and as time goes by, we are seeing more positive results on the net run rate emerging as well. You will be seeing two factors.
One is the normalization of the growth on that front. That will happen in Q3 and Q4. Second is the price benefit, which will get fully utilized in Q3 and Q4 as well. Instead of having the benefit of just one third of the quarter, you'll have the full quarter benefit coming into play. We're very positive and comfortable on that front. We have not seen any negative reactions from social media as well.
Undoubtedly. The question regarding the month of June, so we know the impact. Month of June compared to the month of June last year, how much do you see the revenue growth in the fresh dairy and the margin profile?
We don't disclose monthly growth rates.
Sure thing.
I-
Sure thing. Okay.
Yeah.
Sure thing. Okay. The other question regarding the poultry prices, as you've mentioned that you've succeeded in selling 88 million birds in this quarter, compared to 73 million birds in the same quarter last year. When I calculate the prices, I get to an average of around SAR 13.2 compared to SAR 13.7 same quarter last year. More importantly, I get SAR 13.6 last quarter, this gives me a decline of quarter-over-quarter. Is this accurate? Do you see a decline quarter-over-quarter or?
No, we don't. The reason is the channel mix. What you are seeing here, and talked about it on the channel ratio when I talked about the growth rates in food service. Majority of the product on poultry is also going in food service, and food service generally is lower than retail. Product channel mix makes a big difference in pricing impact. If I look at pricing on a channel-by-channel level, we actually have in fact improved pricing across the board within poultry segment, the mix will make a big difference. On top of it, if you're making export sales to different countries, let's say if you're selling chicken wings to China as well, the frozen mix, that makes a big part. The way we look at pricing, we look mainly at on each channel level.
On that level, we are seeing improvement from Q4 last year to Q1 to Q2. Across the board, the market is much more positive and healthier than it was, let's say, six months ago.
Any rough figure on price improvement quarter-over-quarter or like for like?
Look, I would say on a per chicken basis, it could be anywhere between SAR 0.50- SAR 1 improvement.
Thank you very much.
Before moving to the next question, I would once again request all the participants to please limit your questions to two at a time so that we can cater most of the participants. Our next question comes from Raghad Al Najem. Your line is unmuted. Please unmute yourself locally and go ahead with your question.
Hi. Congratulations, management, and thank you for the great presentation. I have one question from my end. Is the inventory buildup at the current higher prices? If we so, how should we look at the margins for the dairy segment? This is the first question. I have a follow-up.
Okay. Look, as we talked about, the higher cost of corn and soya is reflected in the current P&L as is. That's something that's already reflected in the run rates. You are seeing the higher cost for the full quarter. What you're not seeing is the pricing impact for the full quarter. There's a huge lag in between, and you can adjust for that difference separately. Alfalfa cost, however, will impact in Q3 and Q4. Alfalfa cost is having a 19-month to 18-month cover. You can imagine whenever the new shipment comes, it affects the monthly profit by one eighteenth. Next month, another one eighteenth. It's delayed. Whereas corn and soya is one fourth. It affects the P&L much faster.
If you ask me, for the next two or three quarters, I expect cost per unit to be slightly higher because of alfalfa cost coming in. That's only one part of cost coming in. I expect price realization to be even higher than that because we only saw the price benefit for 30 days in the quarter instead of 90 days. I do expect movement on both the revenue per liter as well as price per liter. [Non-English content], what I do expect is that revenue per liter will be growing faster than, let's say, cost per liter.
Thank you. Thank you very much.
Thank you. Our next question comes from Nada Abdulmalik. Please unmute yourself locally. We have unmuted you. Can you please unmute yourself locally? Right. I think there might be a connectivity issue at their end. I will take the question from Fatima Al. I am unmuting you. Please unmute yourself locally and go ahead with the question.
Just a question regarding the UAE. We can see that the growth in UAE was 2% for the year. If you can just break it down between volume and price, and how do you see the UAE now, going forward in terms of volume growth?
Look, we expect normalized trading conditions to return. I would say volume growth rate was just about break even. It was flattish volume for the quarter. All I can say is the beginning of the quarter was quite negative, but it has improved as the quarter progressed, and we are quite positive on it at the end of the quarter than the beginning of the quarter. That's the current situation in UAE.
Okay. Thank you.
Thank you, Fatima. Nada, please unmute yourself locally and go ahead with your question.
Hello. Am I audible?
Yes, Nada. We can hear you.
Yes. Thank you for the call, and congrats on the new position, Ikram. I have one follow-up question in regards to the dairy price increase. As you clearly mentioned, half of the net pricing impact was coming from dairy, which is SAR 61 million of the SAR 123 million. This is for only one month. If I annualize it, actually, I'm getting an impact of pricing around SAR 732 million for the full year, assuming there will not be any impact from the volume. Can you confirm my understanding whether these numbers make sense or not?
Nada, I think your calculator is running a bit fast. Let me come back to it. I would say, look, what I said is half the growth, and then Abdulhadi confirmed that as well, half was from bakery and the balance was from two major categories, dairy and food. Let's say, of the half, is it 80%, 70%? Something like this on that front. I think we need to take a lower number. I would say you have to take into consideration the month of June. Annualization for the month of June is not appropriate. There are two or three factors. We have the effect from the Eid and the delay in Eid in that as well. Remember, Eid in last year was done in June, whereas it brought back 10 days back. What happens in June, we cannot take a 12-month multiplier factor.
Laban is very high in June, for example, but it will go very low in winter months. Annualization doesn't work appropriately. I would say I'll take the number, but I will run with a slightly lower multiplier effect, not the one that you got.
Okay. Is it possible to share a range on the pricing impact?
Okay.
For example, if we can put it this way, how much of your total fresh dairy sales is related to Laban and milk? Because I understand part of it is related to Laban and yogurt.
On the top of my head, it could be two-thirds, because Laban is very big, and then you have yogurt section as well, and you have Labneh, Gishta, you name it. Let's say on average, let's say two-third of the dairy is the Laban and milk. Of that, again, you have to please consider that part of it relates to the Gulf country as well. If you take the population mix, let's say 70% of the population of GCC is in Saudi and the balance is in Gulf.
I think we need also to mention that the different SKUs.
Yes, please. Yeah.
Which is also an important part to consider when you try to come up with the annualized impact.
Actually, that's a very good point. Yeah, because remember, the pricing is done on family size SKUs. It's done on 1 L , 2 L , and 2.85 L. The single-serve SKUs, which lets it do 360 ml and the 180 ml , are still not touched. There's a lot more to it that will go in the mix.
Fair enough. Thank you very much, gentlemen.
Thank you.
Our next question comes from the line of Rashad Kawan . Please unmute yourself locally and go ahead with the question.
Hey, guys. Hey, Ikram. Hey, Abdulhadi. Thank you very much for giving me a chance to ask some questions. Congrats on the results. I have two if I can. One, I know you've kind of answered some of it. Would love to hear your thoughts around maybe how freight rates have trended over the last few weeks compared to the initial dislocation you saw in March. I'm just trying to understand margin progression through the second half of the year as you have the full benefit of pricing coming through on dairy like you talked about, but presumably still replenishing inventory, obviously at higher average costs versus what's on the balance sheet today. I think you said in your opening remarks, Ikram, that you expect margins to improve through the years as you put in some corrective actions.
If you can tease that all out for us, that would be great. Then I can follow up with the second one.
On the freight rates, freight rates have improved slightly. In the past, let's say pre-war, we were bringing for $2,000 per ton, and they jumped up to, let's say, around $3,000. They have come down slightly. Let's say they're hovering between $2,500-$3,000. The issue is not so much the rate. Issue is the war risk premium that we have to pay to the shipping companies. They still classify the region in a war situation. Our issue is that the transportation cost is moving in line with oil. As you rightly mentioned, oil is coming down. Transportation rates are coming down, which is affecting all over the globe. Any container that goes from the West Coast of U.S.A. to, let's say, Saudi Arabia, the issue is the premium we have to pay, the insurance we have to pay.
That causes a lot of pain, that's not coming down as much. This is why it's causing this issue. On top of it, there's a big delay at the port. As you can well imagine, the West Coast of the country, a lot of the products are getting routed to the West Coast, to Jeddah and Rabigh port. Because of the delay, because of demurrage cost, this is adding another anxiety factor, that's the reason Almarai went ahead of the curve and increased its inventory cover as well. Look, freight rates will come down. Our biggest worry is how quickly the insurance rates or the war premiums will come down, and they are more than 50% or I would say even 60% of the increase. Our worry is, and that haven't moved.
There's a reduction, but not much as we would've liked to see. The second part on the, you talked about the action taken by Almarai. I was referring to the pricing decision done by Almarai or, let's say, the dairy industry, not by Almarai. The pricing decision done by the dairy industry in Q2, the annualization of that effect that will help us, let's say, in Q3 and Q4. Next year with Ramadan, the market would've stabilized more. That benefit will continue to accrue for the next four quarters.
Okay. I got you. When you said, you expect margins to improve through the year, is that on a year-on-year basis in the second half of the year or sequentially?
Look, I don't want to commit to a margin percentage growth rate right now. I'm unable to give that forecast. Again, it's a forecast still. I do expect if this trend remains stable, if we see a de-escalation of the current situation, at least on absolute terms, we do expect to grow on a year-on-year basis. Again, that is subject to a lot of conditions, and I don't want to commit myself to a high growth number. Standing here today, if we see a normalization of the current situation, we see the actions we have taken, the annualization impact of those actions, we are positive about the results going forward.
Okay. That's clear. If I can ask just my second question. Obviously, the price increase in dairy was a big point of debate for maybe the last 12- 18 months. As you think through, you've had this successful increase so far. Going forward, in terms of cadence of these price increases, are you changing the way you think about this in terms of, "Hey, maybe now we'll get into a more regular cadence, maybe smaller price increases," or is it still, "Let's be more reactive to the environment and then see what we do in terms of pricing"? Does that make sense?
It does. Look, we don't have a pricing committee per se. Look, we look at the market always. For us, consumer come first, we will take pricing decision up or down depending on the market conditions. We are in a FMCG environment with very healthy competition as well. We cannot price a product out of the competition either. We got to be very careful in that respect. We do look at it, we haven't come to a decision where we will keep on doing pricing on a regular basis. We will review it, across the board. That's a normal ongoing process which we have done for the last 49 years. I don't see any change going forward in that respect.
Thank you very much.
Thank you.
Next question is from Mr. Harsh Kadam. Mr. Harsh, I've unmuted yourself. Please unmute yourself locally and go ahead with your question.
Thank you. Thank you for the call. My question is about the food segment category where your market share declined from 35%- 28% in May. I just want to understand, if there's an increase in competition, where is this coming from, and is there any initiatives taken by you to return back to those levels of 35%, 32%, whatever the market share is?
Look, in the food sector, we are focusing more towards profitability. We are not gaining share for the sake of gaining share. We have come to a realization where there were practices in the market which were negative to the overall profitability. It will look nice on the market radar that Almarai is gaining market share and a lot of product is getting sold, but it was at the expense of profitability. We are going through this exercise SKU by SKU, category by category, we are not afraid of taking corrective action, even if it comes at the expense of market share loss. What you've seen today in this current quarter is a part reflection of that. It doesn't mean we are walking away. We will explore other channels.
We'll explore other recipes which are fit for purpose for a particular channel as well, we will continue with innovation in that whole category to go further. For example, natural cheese is growing rapidly in this category. The consumers are shifting towards that category. How do we shift more towards that part and grow that portion of the portfolio instead of competing in a commodity-like category, which, let's say some, not all, of the processed cheese category is becoming. That's the reason for going in that category.
Thank you.
Thank you, management. I would just request that we can limit the questions to one at a time, as we have a very long list of hands raised that I can see. The next question comes from Mr. Mohammed Musa. Mr. Musa, your line is unmuted. Please go ahead with your question.
Yes. Hi. Hello. You mentioned that the demand is improving. What's your assessment for why the demand improved over the past six months and, or versus six months, and why it remained resilient versus the price hikes?
Our worry after the conflict was the depopulation in some of the Gulf countries. That was our major concern at the back end of Q1. When we started the year, we were very comfortable with the consumer trend rates. Although it was taxing for the population in general for general inflation, the consumer pocket was still healthy. We still see a lot of spend going on across multiple categories, be it food, juice, dairy, everything else. When the war started, let's say on the 28th of February, our biggest worry was what will happen to the general demand. We see typical behaviors. We saw long life dairy or food, for example. People have a spike in buying, which we saw in COVID times as well.
We started to see very poor performance in food service in the UAE and other countries where hotels and tourism dried out very rapidly. We were seeing some trends where people were leaving the country as well. For us, that was a major concern that what will happen in the war country. Imagine we are living in a war zone for the last four months now, and we are able to come back and we are reporting a double-digit top-line growth rate. It's a testament to what consumer on the ground is comfortable. They are buying products. They're buying fresh products. They're not, let's say, which they did at the beginning of the war, they're not tilting towards long life products, save the product in your pantry if something happens. The consumer demand, the government actions, and what the region has done is excellent on the ground.
For us, that's a very positive sign. We have some profitability issues, which is driven by what you can see on the transportation cost. We will overcome them in the fullness of time. As long as the consumer demand remains strong, we will come back very strongly.
Mr. Ikram, is growth accelerating? Because this is what I heard from you earlier in the call, volume-wise.
The growth is accelerating, at least for Almarai, mainly driven by the capacity growth of poultry. Think of it this way. It's not so much that the consumer demand might be growing in poultry to the level you're seeing here, because technically it's domestication of the poultry category in the country. The underlying growth rates, I would say, are still stable. We are able, if you think about it, we are growing our capacity by nearly 16%-20%. It's not like everybody in Saudi Arabia is consuming 20% more chicken on a per capita basis. It is a reflection of how we are turning this industry on a more domestic resilience point of view. That's done very positive and very strongly.
The next question comes from the line of [Varun Kumar]. Your line is unmuted. Please go ahead with your question.
Hello. Hi, good afternoon. Am I audible?
Yes.
Yes. Hi. Thank you, Ikram. Just one question from me regarding the purchase of corn and soybean that you mentioned, the increase in inventory cover. I was wondering whether it is opportunistic in terms of securing enough stock, or was the price decline of corn and soybean in June, did that also have a part to play there?
No. Look, I think those orders were placed ahead. We were trying to bring the shipment as early as possible. We were using Jeddah and Rabigh port on that front. For us, the food security, the availability of the raw material to be able to supply food to our consumers, that's paramount. We can have all these factories, but if we don't have the raw material, what do we do with it? For us, the material were coming mainly on the West Coast. The orders were in place. We accelerated the order to make sure they come ahead of time. We offloaded them as quickly as we can. By choice, we were increasing our inventory cover. As I stated earlier, we went from four months to six months.
It is impacting our cash flows, impacting our funding costs. We believe it's the right choice to make, so we are comfortable going forward, at least for the next six months, that we will be able to produce the foods, everything on the go as well.
Thank you, Ikram. The next question is from Mohammed Al-Alwan. Your line is unmuted. Please go ahead with your question. Mohammed, can you please unmute yourself locally? Right, there might be a technical issue at Mr. Al-Wan's end. We will take our next question from [Nora Al-Sugair. Nora, please unmute yourself locally and go ahead with the question.
Thank you for the call. My question is regarding the poultry, sorry, the dairy segment. The increase in dairy prices, is it across all dairy products? Is it sufficient to offset the increase in cost? If it's not, to what extent does it offset the increase in cost?
Hello.
Thank you, Nora, for the question. Well, the dairy price increase was mainly in the multi-serve categories, the fresh dairy multi-serve categories, the 1 L , the 2 L , and the 2.85 L. The other SKUs haven't changed. The increase is not more about the absorbing or mitigating the cost. It's more about maintaining healthy margin that can sustain the business going into the future. This is the main reason for having the price increase for these specific categories.
Mr. Mohammed Al-Alwan, I have unmuted your line once more. Please unmute yourself locally.
Hi, am I audible?
Yes, please.
You are. Thank you, Ikram, and congrats for the excellent results. I have two question, one on the profitability and one on capital allocation. On the profitability, the return on incremental capital is very critical for us to assess these massive investments in poultry and the expansion. I would really love if you can give us color on how do you measure the profitability internally for each segment? Because you have the biological assets where if you're expanding there, the cost is front-loaded, and for the herd to reach maturity, it will take time. How do you normalize for this? Also, some of the capacity that sits in work in progress is idle, distorting the return on capital. I want to get the color on what the management is using internally to assess the value added of these CapEx.
The second question is on the capital allocation. What's the priority of the management today, given that you are past the peak cycle in CapEx?
Okay, I'll start with the first one, Mohammed. Let me give the example on poultry and let's say other CapExes. Look, we measured these CapExes on IRR or the return on invested capital, and that's our paramount focus. Unfortunately, in our industry, be it biological assets or factories or farms, sadly everything is front-loaded. You name it, and it goes from that direction. In our industry, you will have a huge CapEx up front and the returns come later in life, and that's how the cycle works. Right now, if you look at our balance sheet, we still have around SAR 5 billion of asset under construction. When we as management looking into this thing, we have spent a lot of money, but there's a lot of CapEx, it's stuck into non-performing assets, and that's a matter of time.
You will see, [Non-English content], in the next few, not I would say next seven to eight quarters, it might take beyond one year, but you will see the result of these investments coming through. You will see this from, for example, red meat, seafood, Premier Chef, more avenues for poultry, frozen bakery, frozen poultry. All of these CapExes are in play. We have spent the money. We have seen the SAR 5 billion on asset under construction, but unfortunately, the return is not there. When we improve these CapExes, when we do a proper IRR, we are still positive that we're doing much more than weighted average cost of capital. It will take time because to construct any factory or any of these large-scale assets, it takes time and effort.
Have comfort that when this cycle is winding down, the SAR 18 billion, you see it coming down more and more every year. You will see correspondingly an increase in revenue, in margin going up because these assets will then start to give return. When you see new avenues coming on board, that's when you see the benefit of these investments coming through. Rest assured, for us, the key measurement factor remains the ROIC, and we measure ourself to the stick on that metric. Coming back to your second question in terms of how are we measuring the rate of return or the capital allocation. Look, currently, we are going through a strategy review with our CEO, Mr. Fawaz. We are discussing with the board in the next one or two quarters. We will finalize our strategy for the next five to six years.
We will have a view on the consumer demand. We would like to take a view on how the market is evolving, how the channels are evolving, what the future of this country, the region is, how the food changing preference, as you saw the innovation for Q2, the protein, the indulgence, and what Almarai can do to further its return on existing assets as well as future assets. I think it's premature for me to talk about, but I'm confident in the next one or two quarters. [Non-English content], either for Q3 or Q4, we will have our CEO, Mr. Fawaz Al-Jasser here, who will talk about the strategy, who will discuss it, and we will clearly lay out the plan for the next five years to the market.
Thank you.
For the last couple of minutes, please stick to one question. Mr. Mohsen Ameeri , we are opening your line. Please go ahead with your question.
Thanks. Thanks Ikram, and thanks team. Quick question on the long-life dairy. You've had, I think now, two quarters of pretty strong performance in this category. By my math, it's 16% up, versus last year. Is this a temporary sort of pantry stuffing, or is there something else going on in long-life dairy that's more sustainable?
In the long-life dairy, the majority of the growth is still coming from Egypt. There are two or three factors here. Egypt is having a very good run in terms of long-life dairy. Export, you saw the performance in export, that's also driven by long-life dairy. We had a lower base in export that was driven by that. We started to see positive long-life dairy in the Gulf countries, but that was driven mainly at the earlier days when the war started. We can see those trend rates coming through. For us, in totality, UHT is growing, but I would not say you look at 16%, it's not growing at 16%. I would say low to mid digit single growth rate. That's what's happening in the market, and we are growing at the market rate in that respect.
Awesome. Thank you.
The next question comes from the line of Muhammad Saad. Saad, please unmute yourself locally and go ahead with your question.
Thank you. Thank you Aljazira, and thank you management. I just have a couple of questions. Number one, we haven't seen any increase in long-life milk prices. Any reason for that, if you can share? My second question is with regards to your finance cost. I believe right now you're capitalizing that finance cost. What normalized finance cost should look like going forward? Thank you.
I'll start with the second question, I'll come back to long-life dairy in a second. For us, I think the normalized rate right now of the SAR 5 billion CapEx, and if you take an average of, let's say 6%, five times six is SAR 300 million. I think last year we capitalized around SAR 280 million, if I'm not mistaken. Something like that.
Yeah.
Last year. For us, look, as long as the AUC remains high, I expect the capitalization rates will continue to be high at that level. I'm expecting around SAR 250 odd million in interest rate capitalization for the current year. It will phase out. It will phase out over the next three to four years as AUC get phased out once you start to have the red meat project, the seafood, the poultry expansion, it will continue to come in phases. In terms of the UHT market, look, we are the number two player in UHT markets. We are following the market leader. We are not out there that we will start to have price increase ahead of the market leader. We will follow the normal market norms as we've done in the past as well.
We do not see the price increase very heavily in the market. We see a lot of discounting, a lot of changes in discounting. Some channels have started to have higher discounts, some have lower discounts. Nobody's changing the price in the market. The market is getting played by the level of discounting, and that's how the long-life market is moving. As I said, we are a follower of pricing in this market, not the lead.
We'll take a last question from the line of Inge. Inge, please unmute yourself locally and go ahead with your question.
Thank you. Thank you for the call, and congrats, Ikram, on the new position. My question is with regards to the subsidies on alfalfa and poultry. Are the subsidies still the same, or are there any changes? This is my first question. My second question is about the stock of corn and soybean, and alfalfa. Previously, you used to mention that there was rolling hedge or there is rolling hedge for alfalfa and corn and soybean, and you have a stock of one year for alfalfa and six months for corn and soybean. What has changed, to grow your cover in both alfalfa and corn and soybean, though you have already hedging contracts and stock in place?
I'll start with the first one. On alfalfa subsidies, we have not seen any change. It's continued the same way. The government is paying on time. We have not seen any delay. We see a less than six-month recovery position as well, and it has come to such a good position that we are accruing for subsidy, it's not on cash basis. Poultry subsidy remains erratic. We do receive it, the rate is not uniform per se. We are recording on cash basis, I have to admit, for the first half compared to same period last year, it's very similar. We have not seen any change in the poultry subsidy. It is at a lower rate, lower rate has continued. It has not further deteriorated. Coming back to your next question on corn and soya and alfalfa.
Look, we never took a cover for alfalfa. I would say nearly 40% of alfalfa is produced by us internally. Because we are producers ourself, we do not take a hedge in that market. We are a demand aggregator. We will buy alfalfa in U.S. and Argentina. We will press it, and we will sell it to our Saudi parent company. For that reason, Almarai never takes a hedge for alfalfa. We do take hedges for corn, and we take a hedge for soybean. It's done on a rolling eight quarters. It's done on periodic basis, and we are still keeping the hedges. Look, hedges will continue as normal. We already are taking some hedges for the next year as well, it's the physical inventory.
What we have done here is we're increasing our physical inventory on hand to manage any unexpected event, whatever that event might be. We haven't changed our policy. That's continuing as is. It's just the cover on hand has gone up. With that said, I think that was the last question.
Yes. Thank you.
Thanks, Ikram. Once again, this concludes the Q&A session. If anyone has unresolved queries, you are more than welcome to reach Almarai's IR team via their email. We will share the questions in the chat box with Almarai's management. On behalf of Aljazira Capital, I would like to extend my sincere thanks to the management of Almarai and participants for taking their time for the call. I will now hand back to the management for closing remarks.
Thank you, Irfan. Thank you to all the participants. Thank you to our CFO, Mr. Ikram Ulhaque, for this session.
Ladies and gentlemen, you may exit the call.