Almarai profits up 8.8%, cautious about mounting costs

By Eliot Beer

- Last updated on GMT

Sales and profits are up at Almarai, but its poultry division, and others, have been hit by rising costs
Sales and profits are up at Almarai, but its poultry division, and others, have been hit by rising costs

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Saudi dairy firm Almarai ha seen its second-quarter profits rise 8.8% year-on-year to US$116m, with sales up 14.4% to reach US$826m, as the company faces higher wage and commodity costs.

Almarai’s sales growth was driven by strong performances from all sectors except poultry, the company said in its earnings statement. It acknowledged its growing costs, which it said were mainly due to fluctuating commodity prices, and the Saudi government’s efforts to encourage firms to employ Saudi nationals instead of foreign workers.

Almarai’s net profit growth over the same period has been affected by the increase in labour costs, mainly because of the localisation programmes, the persistent increase and volatility in some raw material costs, in particular dairy commodities, and the fact that the overall cost basis is put in place in advance of future sales growth​,” said the firm in its earnings statement.

Pricey poultry

Research firm Shuaa Capital said Almarai’s growth prospects were good, but noted its growing costs, particularly from Saudisation, and its nascent poultry business. Earlier this year Almarai said it planned to invest US$1.3bn in its poultry operations.

Management has pointed to payroll costs as important drag on margins, highlighting two areas in particular: localisation programmes, driven by the government directive to increase Saudisation among companies; and hiring of employees ahead of expansion of operations at the company, with poultry standing out as a key area in this regard​,” said a research note from Shuaa Capital.

Almarai has announced a number of other major investments this year, including a US$345m joint venture with PepsiCo in Egypt to develop dairy farms and fruit juice factories. It also announced it will spend US$73m on a facility in King Abdullah Port to import animal feed.

Farms and formula

The firm said it spent US$434m on capital investments in the first six months of 2014, including US$47.5m on farmland in Arizona, and US$83m on its acquisition of the International Pediatric Nutrition Company in January. It also said it had made investments in its distribution facilities across the GCC.

Without any external influences, Almarai expects increasing growth in products demand in its core businesses during the third quarter of 2014, which includes the high seasons of the holy month of Ramadan, this growth is expected to be fulfilled with the existing production and distribution facilities, as a result the growth in sales is expected to continue for the third quarter​,” said Almarai.

Our ability to meet the growing demand will be fulfilled thanks to the prior investments realised in the productivity and efficiency of our farms, manufacturing and distribution facilities, as well the new products introduction flow during the first six months of the year​,” it added.

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