First Mills records topline growth, double-digit margins; market share over 30%: CEO

Abdullah Ababtain CEO of First Mills 

First Milling Co. (First Mills) recorded topline growth and double-digit margins in the first half of 2023, delivered by the successful execution of the company's growth strategy through both B2B and retail channels, CEO Abdullah Ababtain told Argaam.

He added that the company's capacity utilization increased by 4% to reach an impressive 99% during the first half of the year, indicating that this period witnessed a number of factors, including the coincidence of the Holy Month of Ramadan, which is a peak sales period for First Mills.

During this period, the firm experienced a decrease in feed volume, primarily attributed to abnormal weather patterns that influenced animal grazing behaviour. The favourable weather conditions prompted increased grazing activity, causing livestock to rely more on natural pastures and less on compound feed.

With an estimated volume market share of over 30% in the flour products market in the Kingdom, based on data from the General Food Security Authority (GFSA) for 2021, First Mills holds a leading position in this sector.

Here are details of the interview:

Q: First Mills's earnings fell 43% to SAR 34.9 million in Q2 2023 from SAR 61.3 million a year earlier. How do you see these results?

A: In H1 2023, First Mills achieved topline growth and double-digit margins, delivered by the successful execution of our growth strategy through both B2B and retail channels. Moreover, Q2 2023 capacity utilization reached 99%.

Having said that, we should clarify that there were several cost factors that took place during this period that did not occur last year and therefore require an explanation for the benefit of our long-term shareholders.

Firstly, Ramadan is a peak sales period for First Mills. In 2023, the majority of the Holy Month shifted from Q2 to Q1 in the Gregorian calendar, therefore impacting the top line slightly during the Q2 2023 period compared to last year.

Secondly, First Mills experienced a decrease in feed volume, primarily attributed to abnormal weather patterns that influenced animal grazing behavior. The favorable weather conditions prompted increased grazing activity, causing livestock to rely more on natural pastures and less on compound feed.

Thirdly, as is normally the case for milling companies, temporary shutdowns of mills happen for maintenance, upgrades, or other operational purposes.

This was the case with Mill C in our Jeddah plant which was temporarily shut down to upgrade its capacity. This led to an increase in our selling & distribution costs during this period to support the Jeddah plant operationally.

Lastly, as was mentioned in our IPO prospectus, First Mills merged with its parent company, Al Raha Al Safi, who had taken a senior loan and bridge loan to buy its stake in the company, and as per the merger agreement, post-merger the senior loan would be passed on to First Mills and appear in its books.

It is worth noting that the bulk of the loan is hedged at an attractive interest rate cap and will mature in 2035. It is also worth noting that the bridge loan was paid off by Al Raha Al Safi in September 2022.

In spite of these higher cost factors, H1 2023 yielded a robust net profit margin by most standards of 23%. Moreover, if you exclude the impact of interest costs, the like-for-like H1 net profit of SAR 108.7 million remains in line with the previous year.

Q: What is the impact of merger with Al Raha Al Safi on the company's Q2 performance?

A: The merger with our parent company, Al Raha Al Safi, resulted in an increase in finance costs. After the merger, First Mills absorbed the loans of the parent company (absorbed by First Mills), resulting in an increase in finance costs of approximately SAR 25 million in the first half of 2023, with SAR 13 million incurred in Q2 alone. This increase is directly attributed to the consolidation of debt and interest payments associated with the merger.

However, it is important to emphasize that the merger did not impact the day-to-day operations of First Mills since Al Raha Al Safi was a Special Purpose Vehicle (SPV) specifically created for the purpose of the privatization of First Mills.

While the finance costs impacted our net profit, our strong operational performance and focus on efficiency have enabled us to maintain robust double-digit margins, showcasing the resilience of our business.

Q: What are the main factors that contributed to the significant increase in the performance of the flour sector?

A: Flour is our flagship product, contributing more than 60% to our topline. Flour sales grew 7% YoY rise in H1 2023 - and 9% YoY in Q2 2023 - reaching SAR 274 million, fueled by the Company's ongoing strategy execution initiatives, the busy Ramadan season, and growth in the retail pack sector.

For a variety of reasons, we prefer not to publicize our sales volumes, but we can confirm for H1 2023 our flour sales volume grew by 5% compared to last year. To achieve this growth, we placed strong emphasis on improving operational efficiencies, quality control, and marketing - the latter being the 360 marketing campaign to further build Aloula’s brand and drive sales. This strategic initiative yielded remarkable results, reinforcing our retail brand's premium status. As a result, Aloula witnessed an impressive YoY growth of 21% in Q2 and 20% in H1.

Q: What was the company's market share in Q2?

A: First Mills stands as one of the largest producers of flour-based products and byproducts, with a significant market presence in both volume and sales. With an estimated volume market share of over 30% in the flour products market in the Kingdom, based on data from GFSA for 2021, First Mills holds a leading position in this sector.

Additionally, we have established an advanced position in the compound animal feed market, boasting a market share of more than 16% of the total market share. Our strong market presence and leading positions reflect our commitment to excellence and the trust placed in our products by customers across the Kingdom.

Q: What was the total production capacity of First Mills factories in Q2?

A: First Mills operates through its four branches in Makkah Region (Jeddah Governorate), Al-Qassim Region (Buraidah Governorate), Tabuk Region (Tabuk City) and the Eastern Region (Al-Ahsa Governorate) with an aggregate flour milling capacity of 4,200 tons per day and feed mixing capacity of 900 tons per day.

During the first half of the year, our capacity utilization increased by 4%, reaching an impressive 99%. This demonstrates our continuous efforts to optimize our business and enhance operational efficiencies. However, it is worth noting that during the temporary shutdown of Mill C at our Jeddah plant, which was undertaken for capacity upgrade and long-term value enhancement, our capacity temporarily declined to 3,900 tons per day.

Looking ahead, we remain committed to expanding our capacity and further strengthening our market leadership. A significant step in this direction includes the expansion of Mill C located at our Jeddah plant. Post-expansion, we anticipate an additional capacity of 250 tons/day of wheat milling. This, along with efficiency improvements, will bring our aggregate flour milling capacity to 4,450 tons per day.

Q: Are there plans for expansion and upcoming projects for the company?

A: First Mills is actively pursuing modernization initiatives to increase the capacities of our mills, ensuring we can meet the growing demand and optimize production efficiency.

In line with our commitment to product innovation and diversification, we have successfully launched two significant projects: the PESA Mill and the Mixing plant. By expanding into high-value sectors, we aim to achieve higher margins as well as bolster our top line and bottom line.

Looking ahead, we are on track to commission two more critical projects by the end of this year. The first is our Durum Mill, which will enable us to produce durum wheat-based products, catering to the lucrative pasta and noodles market. In addition, the expansion of Mill C, situated in our largest facility in Jeddah, is nearing completion. This expansion will significantly increase our production capacity, enabling us to cater to the growing demand and better serve our customers.

Investing in our Aloula Brand is a key component of our retail business growth strategy. Our goal is to increase brand awareness, secure top-of-mind positioning, optimize share of shelf, and expand distribution to solidify our position in the retail sector.

Q: What are your forecasts for the company's performance until the end of 2023?

A: As we look ahead, we are confident in the sustained demand for flour, feed, and bran, driven by strong customer demand in the Kingdom. Furthermore, the increased capacities resulting from the Mill-C Upgrade, along with contributions from our new products, such as PESA, flour mixes, and durum will further support our growth trajectory.

To enhance our financial performance, we are committed to cost initiatives, optimizing operational efficiencies, and streamlining processes. This focus on cost management will help us achieve higher margins and improve our bottom line. We will also continue to progressively deleverage our balance sheet to reduce our exposure to finance costs and interest rate risks.

The continued success of our Aloula brand is expected to be a key driver in advancing our higher-margin business. By capitalizing on brand recognition and customer loyalty, we aim to further strengthen our market presence and profitability.