Aramex : ARMX Q2 2023 Investor Call

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ARMX Q2 2023 Conference call	Thursday, 10 August 2023
	Ali Afifi	Good afternoon, everyone, and welcome to Aramax 2Q 23 Earnings Call. This is Ali Afifi from

EFG Hermes. And today, on the call, we have Mr Othman Aljeda, Chief Executive Officer, Mr Nicolas Sibuet, Chief Financial Officer, Mr Mohammad Alkhas, COO of Aramex Logistics, Mr Ala'a Saoudi, COO of Aramex Express, Miss Anca Cighi, Investor Relations Director, and Mr Mohammad Abeidat, VP of Technology. Without further ado, I'd like to hand over the call to management. Please go ahead.

Anca CighiThank you very much, Ali, and dear ladies and gentlemen, good day or good morning to you, and thank you for joining our investor call. Our financial results for the second quarter of the year are available on our IR website as well as the Dubai Financial Market website.

Before we begin this presentation, I would like to draw your attention to page number two. Some of the comments made on this call today may be forward-looking statements based on our view of the business and macroeconomic trends as we see them today. These elements can change due to a variety of factors, and therefore, you should not assume that we will continue to hold these views in the future. I will now hand over to our CEO for the opening remarks. Please go ahead.

Othman Aljeda Thank you, Anca. Good afternoon, ladies and gentlemen. Thank you for joining our call to discuss our financial results for the second quarter of 2023. We reported $378 million in group revenues, which is a decline of 8% compared to the same quarter of last year. As you know, the markets remain challenging, and you'd have seen the developments in the global industry, with volume softness in Express and the rates falling in freight forwarding.

Now let's unpack our revenue performance. Of the 8% decline in our revenues, it's worth noting that 3% is coming from currency devaluations and 2% is coming from decrease in working days in Q2 this year compared to the number of working days in Q2 of last year. And this is due to the shift in public holidays in certain markets. The remaining is attributed to the volume decline.

I would like to highlight that we have maintained our focus on the yield and the quality of revenue and we are indeed seeing encouraging signs across our business. We have significant growth in business from our time-definite products from SMEs and B2B customers, as well as from strategic verticals such as beauty products and industrials. Our focus on heavy yield businesses is reflected in our group margins. We maintained our GP at 25% and our EBITDA at 10%, despite the softness of the top line.

Of course, this performance was also sustained by our focus on efficiencies. In Q2 of 23 compared to Q2 of 22, we doubled our regional PUDO network. We further improved courier productivity by 8%, and we lowered our line haul costs by 25% per kilo.

However, given the current challenges, we know that we need to do more. We have a clear plan for further reductions in both our direct costs and our G&A expenses for the second half of the year. We expect to bring these down to pre- pandemic levels. These actions will counteract part of the weakness we are seeing in our net income performance. Therefore, our priorities for the second half of the year are to increase our efforts on cost management and remain focused on yield.

Issue 1.0 11/08/2023

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ARMX Q2 2023 Conference call	Thursday, 10 August 2023

Product wise, I expect International Express and Freight business to remain challenging for the second half of the year, while our Domestic and Logistics products are resilient. Again, I need to highlight the strength of our home markets in the GCC, which remain our biggest contributor to the group revenues, which increased profitability by 3% during Q2 of 23.

Before handing over to Nicolas for the financial overview, our VP of Technology, Mohammad Abeidat, will take a couple of minutes to run through an important technology roll-out which is starting next week. Please go ahead, Moe. Thank you.

Mohammad Abeidat Thank you, Othman. Good afternoon or good morning, ladies and gentlemen. It's a pleasure to speak with you today. Let's move to page ten, please, thank you, for a brief overview of an exciting technology announcement, which is in line with our strategy to increase efficiency across operations and improve customer experience.

Next week, we're launching live tracking for our last mile deliveries. We are doing this using the new Mobility Services provided by the Google Maps Platform, and in partnership with OniGroup. It's a project that has been months in the making, and we're very pleased to see it come to life. As a matter of fact, I'm speaking to you today from Google's offices in London.

We're actually the first logistics company in our region to launch live tracking for courier drivers, and we are one of the first companies globally to launch this new, exciting product with Google. So how will this product work, and what exactly do we mean by live tracking?

If you think of your customer experience when ordering an Uber driver or Careem, this will be very similar to that. It will provide customers with live tracking and visibility of the location of our courier driver, the route and the estimated number of stops until it reaches you, the customer.

The courier will, of course, have several other deliveries to make alongside his or her route, hence the number of stops and visibility on the route is important for the customer. You will also get live updates based on the changes, such as real-time traffic conditions, at all times. You'll be able to see where the driver is on the map in real time as well.

The customer will be able to see a two-hour estimated slot for the delivery time at the start of the day, and as the driver gets closer to your destination, you'll be able to track the number of stops remaining and the exact time of arrival to your location.

In addition to the customer experience benefits, this also has an impact on our operational efficiency. The courier driver will have better route optimisation, be able to deliver more packages in a shorter timeframe, and overall, reduce fuel consumption and costs. I will now hand it over to Nicolas for the quarterly financial overview, and I remain on the call should you have any questions later on. Thank you.

Nicolas Sibuet Thank you, Moe. Good afternoon, everyone, and thank you again for joining this call. We will start with the product performance as usual, followed by the group-level overview. Next page, please, Anca. Thank you. Let's have a look at the volumes for the International Express product.

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ARMX Q2 2023 Conference call	Thursday, 10 August 2023

We saw a decline of 7%, year on year, in consolidated volumes reported in Q2 23 compared to Q2 2022 and a 2% growth, quarter on quarter, in Q2 2023 compared to the first quarter of this year. This performance is in line with the broader industry trends due to the softness in volumes compared to last year, whilst the improvement, quarter on quarter, provides an indication of what we are focusing on, stabilising volumes and growing them afterwards.

Analysing our volumes more closely, it is worth noting that we are seeing positive signs such as double-digit growth in our B2B volumes and time-definite products, which is in line with our strategy to focus on higher yield accounts while also diversifying the business. On the next page, that is the financial impact for this International Express product.

The International Express product growth profitability was resilient over the past few quarters, driven by a strong performance in the GCC markets, the addition of MyUS business and the continued strength of our Shop & Ship product.

Revenue was down 5% year on year in Q2 2023. It is worth noting that we have also seen an impact from the public holidays, as mentioned by Othman a bit earlier, during Q2 2023, which lowered the numbers of working days, impacting the revenues for Q2 this year compared to the same quarter last year.

Good cost management, including a decline in our line haul cost, did deliver an improvement in the gross profit margins, from 32% in Q2 2022 to 34% in Q2 2023. This is reflective of the attractive margins in the parcel forwarding business, which includes MyUS and Shop & Ship.

Looking at our per-shipment data, on a consolidated basis, the trends are also positive, and we can see consistent improvement over the past few quarters at gross profit levels. Looking more closely at the revenue per shipment evolution, we note growth from rate increases as well as the addition of MyUS counteracting the decline coming from the change in customer mix, the foreign currency impact and the drop of COVID-19 and fuel surcharges, as well as a decline in cash on delivery business.

So in summary, the International Express is probably the product that is most impacted in all the different products that we have running, and this is the area of the highest focus for the management. Turning to page 14, please, Anca, on the Domestic Express segment.

The Domestic product is resilient, with a 1% increase in volume in Q2 2023, year on year, driven by a strong performance in our own markets in the GCC and MENAT regions. We previously talked about the restructuring taking place in Oceania. Excluding this market, volume increase was 2% for the same time period.

Operationally, we doubled our PUDO network in our regional markets in Q2 2023 compared to the same period last year, while also increasing our sales force, especially SME specialists. We have seen significant revenue and volume growth from SMEs in year to date, particularly in the UAE and KSA, where we are currently focusing our sales effort, with plans to extend our SME offering and marketing activity throughout the network.

On page 15, it is worth noting that the financial performance of our Domestic product is impacted by currency devaluations amounting to $8.8 million on revenue and $3.4 million impact on gross profit level.

Excluding the foreign exchange translation impact, revenue grew 3% against a reported decline of 6%, while the gross profit declined 6% and the gross profit margin declined to 23%, impacted by the softness of the top line. There were

Issue 1.0 11/08/2023

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ARMX Q2 2023 Conference call	Thursday, 10 August 2023

a few one-off impacts in Q2 2023, such as fewer working days, and we expect the profitability of this product to return to historical levels in Q3 2023.

Looking at our per shipment KPIs. Currency devaluation and the decrease in fuel surcharges have offset improvement in revenue per shipment, which we have seen from rate increases and the change in customer mix, meaning more B2B customers.

As we progress with our strategy to refocus the Domestic product to a more premium offering, we expect the margin to recover to prior quarter levels. We remain focused on attracting higher yield business such as the time-definite products and more B2B clients, as well as implementing efficiency initiatives, such as the real-time package tracking that Moe just mentioned.

On the following page, we have seen much more headwinds in the freight industry globally, which have impacted our business as well. Sea freight rates declined significantly, which led to a shift in volumes away from air freight and back to sea freight. You will see this trend reflected in our business as well, with double-digit growth in sea freight volumes counteracted by a double-digit decline in air freight volumes. It is worth mentioning that last year, we had a higher number of charter flights which also contributed positively, and basically to the decline, year on year.

We are pleased with the resilience of our land freight product, despite the lower number of working days due to the shift of the public holidays in this region. Our Freight team remains focused on operational efficiencies, as discussed last quarters. We are glad to see these efforts reflected in a double-digit drop in direct cost, delivering a relatively stable gross profit and a three percentage point improvement in gross profit margin to 16%, while our EBIT and EBITDA margins were stable, despite the softness at the top line. Next page.

For the Logistics product, revenue is down 5% year on year, mainly due to the devaluation of currency in Egypt and other markets. Excluding this impact, revenue would be up 2%. During the second quarter of the year, we had an increase in cost as we are ramping up operations in key markets, and we have made new hires.

During Q2 2023, we also opened new facilities in Jeddah and in India, while the specialised pharma warehouse facility in the GCC is on track, opening in Q2 2024, with the corresponding financial impacted expected next year. It is worth noting that the energy vertical supported the resilience of the Logistics product, with revenue growth from energy businesses. Aramex won an important contract from a major oilfield service company in Houston, Texas, during Q2 2023.

As a reminder, last year, the performance of our Logistics product was positively impacted by certain one-offs associated with insurance refunds and other accounting adjustments. Therefore, we see a decline in absolute gross profit, EBIT and EBITDA, year on year.

The margins are in line with last year, reflecting the improved revenue quality and operational efficiencies. The gross profit margin was 15% in Q2 2023 compared to 15% average gross profit margins in 2022, while the EBITDA was 22% in Q2 2023 compared to the average 21% in 2022. The decrease in utilisation during Q2 2023 compared to the same period last year impacted the gross profit margin, which is expected to recover over the next few quarters as utilisation in the new and existing warehouses is building up. The following page, please.

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ARMX Q2 2023 Conference call	Thursday, 10 August 2023

Let's have a look at our consolidated group revenue. As we have discussed just now, during the second quarter of the year, the market was challenging, with added headwinds from inflation, currency devaluation and an average of two less working days across our network this quarter. The average revenue per day for the network is approximately $6 million a day, meaning that two working days has had an impact of approximately $12 million, contributing to a 2% decline in Q2 2023 revenue.

Domestic and Logistics were resilient, posting growth in revenues, when excluding foreign exchange impact. International Express continued to be challenging, as we have seen, with lower volumes. And in Freight, we have seen significant rate declines globally, in line with the rest of the industry.

The following page, we will look at the regional contribution to revenues. You will see softness in all markets, with the exception of the US, which is driven by the MyUS acquisition. The MENAT region had a robust performance. However, these markets were impacted by significant currency devaluations.

Excluding foreign exchange impact, group revenue declined 5% compared to the reported decline of 8%. It is worth noting that the volume of MyUS has been particularly impacted by the devaluation of currencies in the core markets where MyUS operates, such as Japan, Angola and so on, which drove down consumer spending.

On the following page, we provide the segmentation by region in this slide. The GCC remains a key contributor to group revenues, and this market also reported growth in gross profit during Q2 2023, while volumes were stable. What's important to note here is that we are well diversified across customers and geographies, with good exposure to our own region, which has a further favourable economic outlook and which is driving a good performance in our outbound markets.

On the following page, we will see a summary of our consolidated group results. Group gross profit declined in line with revenue, while the gross profit margin was maintained at 25%, reflecting our focus on efficiencies and cost management. It is worth noting that gross profit was impacted by $4.8 million in currency devaluation in Q2 2023. And excluding this foreign currency impact, our gross profit declined 4% compared to the reported decline of 9% in Q2 2023 versus Q2 2022.

For the Q2 23 period, organic SG&A, meaning excluding MyUS, was down 12%, while group SG&A, including MyUS, was down 3%. We have a robust plan in place to further reduce our cost for the organic business. In particular, we are implementing additional measures to reduce our organic G&A expenses in the second half of the year to reach similar levels to our 2018/2019 G&A expenses. This will be achieved through efficiency measures, headcount optimisation, IT spend optimisation, and others such as measurement of our sales force performance per individual.

We have also identified further measures to reduce our direct costs for the second half of 2023 through carrier negotiation, further fleet optimisation and through automation, the latter of which will result in lower fuel costs, lower labour hours and lower asset requirements. These actions have been taken to counteract the weakness we are seeing on our bottom line. Let's return to our Q2 results.

We maintained our EBIT and EBITDA margins at a stable level compared to the same period last year, at 4% and 10% respectively. As you know, we have an increase in finance expense of $600,000 in Q2 2023 compared to Q1 2023,

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