Aramex : Q4 2022 Investor Call Transcript

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Aramex Q4 2022 results conference call	Thursday, 16 March 2023
	Ahmed Moataz	Hello, everyone. This is Ahmed Moataz from EFG Hermes and welcome to Aramex's fourth

quarter of 2022 results conference call. I'm pleased to be joined by the entire management team, who as usual will start with a brief presentation and then will open the floor for Q&A. Anca, please go ahead.

Anca CighiThank you very much, Ahmed. Dear ladies and gentlemen, good day to everyone and thank you for joining our investor call. I'm joined today by our executive leadership team. Our CEO, Othman Aljeda, our CFO, Nicolas Sibuet, and our Chief Operating Officers, Alaa Saoudi from our Express and Domestic business and Mohammad Alkhas from our freight and logistics business.

Our fourth quarter materials are available on our IR website and they have also been circulated by email. Before we begin, I would just like to draw your attention to page number two of our presentation, which is our cautionary note regarding forward-looking statements. Now, without further ado, I will hand it over to Othman for the opening remarks.

Othman Aljeda Thank you, Anca. Good afternoon, ladies and gentlemen. Thank you for joining our call to discuss the Q4 and full-year financial results for Aramex. I believe most of you saw our preliminary results, for which we published a detailed press release, and are familiar with our performance. I will keep the opening remarks short, focusing on a few key messages.

To summarise our results, we stabilised the GP margin at the Group level, as well as for our Express and Domestic courier products, which as you know, is a priority for us. For Freight and Logistics we delivered the growth we expected, with growth of GP of 51% and 58% respectively, as well as significant growth in the margins. Our ability to offer an end-to-end service offering from the first mile to the last mile, however, also the flexibility to cater to customer's specific needs by breaking the supply chain when needed, has helped us to win new business across all product lines. While growth is a key focus area for us, we are growing mindfully and profitably, focusing on quality revenue.

For full-year 22 our top line was relatively unchanged from the previous year at US $1.6 billion. However, makeup of the revenues has changed. We're seeing retail contribution from our B2B offering. Collectively, the B2B segment, which includes freight forwarding and logistics and supply chain solutions, made up 36% of our revenues in 22, compared to 29% in 21. We also have less customer concentration risk, with no single customer making up more than 7% of our revenue.

Allow me to say that in 22, it was obviously still a challenging year for Aramex and our peers. Our industry did not see the recovery it expected. We have seen a concentration of post-pandemic related challenges, lingering lockdowns in certain markets, such as China, but also new challenges, inflation and currency devaluations. We had to readjust course a few times during the year, maintaining agility and efficiency, and I believe this will continue into 2023. Having a global operation in over 65 countries means that we are exposed to global operating environments.

However, Aramex benefited from good demand from our home markets in the GCC and MENAT, which today make up 53% of our total Group revenue. Our home markets also supported a good performance in what we call our outbound markets, and I refer to the US, EU, and a lesser extent now, China, Hong Kong, which are feeding our operation across the GCC, MENAT and Sub-Saharan countries. We expect this trend to continue in 2023 and beyond, as GDP projections for these markets are favourable.

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Aramex Q4 2022 results conference call	Thursday, 16 March 2023

Lastly, 2022 marked the 40th year of Aramex operations and this was a great opportunity for us to reflect on our success and to reinforce the entrepreneurial culture that defines Aramex and I believe will be crucial to our next chapter. 22 also marked the first full year of operations under the new operating model. Our business now is stronger than ever, we have four clearly-defined products and dedicated capabilities and systems, as well as dedicated KPIs. Both sales driven and profitability driven, we will continue to invest in our people, making new strategic hires in 23, while also rolling out our CAPEX plan with clear investment plans for each of the product lines.

In terms of the outlook for 23, we need to consider the industry dynamics and trends. For Freight the industry has seen a decline in rates faster and sharper than expected. What this means to our business is that we are likely to see an impact on the gross profit. Noting that we expect to maintain the gross profit margins.

For Logistics, we will continue to grow this product efficiently and profitably, with good contribution from high-growth verticals, such as e-commerce, oil and gas, retail and others. We have scale and deep expertise in key markets, such as the UAE and Saudi, and we continue to see good demand for our specialised warehousing services.

For our Express and Domestic product, our target is to maintain the GP margin digitalisation and cost management initiatives. In terms of volume evolution, we have seen pressure globally in the last few quarters and softness in volumes, coming from the cooldown of the economy, inflation and other challenges in certain markets. These challenges have persisted in January and February of this year.

It's important to remember that the fundamentals of e-commerce remains strong. We remain focused on our long- term strategy. We have a strong and resilient, well-diversified business. We have exposure to high-growth verticals, we have a big liquidity position and a strong balance sheet, which allows us to operate in a dynamic environment while also being able to make the right investments in our business, to unlock value and continue growing. As you know, M&A is an important part of our strategy, and we are working hard to deliver the second acquisition. For the time being, we have no concrete details that we can share with the market at this stage. Thank you for listening to me and I will now hand over to Nicolas for the financial update. Thank you.

Nicolas Sibuet Thank you, Othman. Good afternoon, ladies and gentlemen. Good morning, if you are not in this part of the world. Thank you again for joining our conference call today. We will start with the product performance, followed by the Group level overview.

You will notice, first of all, that for the purpose of this quarterly presentation, we have provided all financial numbers in US dollars. If you would like to read these financials in our local currency, in UAE dirhams, please refer to the IR data book, which provides you with the option to select the display in dirhams or in dollars alternatively, as per your preference. Of course, our financial statements are also prepared in local currency.

Let's move to the next page, please, and have a look at the volume performance for the International Express product. Looking at the volumes in Q4 2022 compared to Q4 2021, we are seeing, as Othman was just alluding to, a softness of

0.2 million shipments, which is a drop of 4%. The volume drop associated with one client from North Asia has masked the growth and resilience that we have seen in other markets. We have seen good consumer demand, especially from the GCC, which is also driving demand from our outbound market, primarily US and Europe, and has helped us sustain volumes for the quarter and driving a better performance compared to our competition.

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Aramex Q4 2022 results conference call	Thursday, 16 March 2023

On the following page, let's see the financial impact. The softness in volume translated to a 10% decline in revenues. However, we have maintained a good cost management and increased efficiency across the business through actions discussed in previous quarters. This has delivered a 15% decline in total direct cost, leading to a 5% growth in gross profit. Therefore, we are quite pleased to report that our GP margin increased 32% in the fourth quarter of 2022, up from 27% in the previous year, which is an excellent improvement. For the full year, cost declined in line with revenues and deliver a stable GP margin of 32%, compared to 31% in the prior year. In 2022 we added two months on behalf of operational performance from our recent acquisition of MyUS, which brought approximately $20 million of additional revenue. Therefore, this year you will see a greater impact from MyUS on our books, as we will be adding a full year of operations.

Moving to the Domestic product. Domestic product volumes have been stable, apart from Oceania. The volume decline for the Q4 and full-year periods are attributed primarily to this one, single market. We have previously discussed a turnaround plan for Australia, which is on track, and as you know, we have a significant domestic operation in this market, which remains very important for our business. It is to be noted that we are seeing this month, as we speak, the very beginning of some incremental volumes from key customers in Australia, on the back of our focus on delivery performance. We view this as a positive and encouraging development, while we remain focused on the implementation of the turnaround plan in Australia. There's lots of work to be done and significant upside to be captured here. Australia represents approximately 40% of our total Domestic volume.

Moving to the revenue page. While revenue for the Domestic product was impacted by some declining volumes, which we just discussed, in Australia, costs were reduced at a higher rate, which helped deliver a 15% improvement in gross profit and GP margin of 26%, significantly higher than the 20% GP margin reported in Q4 2021. Similarly, for the full- year period improved GP margin to 25% in 2022, compared to 24% in 2021.

The following slides, to conclude on the Courier product. On a consolidated basis, adding Express, International and Domestic, we see both products delivered solid revenues of US $270 million in Q4 2022 and US $1 billion for the full year 2022. Our focus on operational efficiency and cost management has helped us deliver stable margins in the last quarter and for the full-year period. Of course the declining volumes and revenue have flowed through the bottom line, reflecting at an EBIT and EBITDA level, however, this remains at robust levels. We ended the year with an EBIT of US $39 million, compared to US $69 million in 2021 and an EBITDA of U $107 million, compared to US $137 million in 2021.

Let's move to the Freight product. The Freight business ended the year with a strong Q4. We have seen good growth from key regions, particularly in the GCC, where half of our freight revenue is coming from. We've grown revenue across air, sea and land freight for both the Q4 and the full-year periods, benefiting from the revival of the oil and gas business internationally, with good contribution from other, high-growth verticals, such as retail, pharma and SME businesses across the network. These verticals will continue to be our focus areas in 2023. The Freight team delivered good results, improving margins across the board with a 4 percentage points increase in GP margin and 3 percentage points increase in both EBIT and EBITDA for the Q4 2022 period.

Moving to the next page, please. For the full-year period, freight forwarding activities delivered revenues of almost US $500 million, improved GP margin to 14% and doubled EBITDA margin to 6%. Freight now contributes 28% to our total revenues, up from 22% last year, which is in line with our stated strategy to grow this product. Going forward, and as

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Aramex Q4 2022 results conference call	Thursday, 16 March 2023

Othman just mentioned, we expect the freight industry to continue to see a normalisation in volume and rates. Which has kicked in faster than expected on all trade lines and is a simple function of the forces of supply and demand in this industry, the easing of congestion, availability of containers in sea freight and the increase in capacity on air freight, particularly commercial aircrafts, coupled with a softening global consumer sentiment and inflation. These two elements have accelerated the normalisation that the industry was expecting.

It's also important to understand that Aramex is growing its Freight business from a relatively smaller base and, with industry being very fragmented, there's market share to be captured. We are leveraging our brand and scale, relationships with clients across the Express and Logistics product and we continue to see good demand for freight services. We have previously talked about the importance of people and relationship in this line of work. We have added good sales specialism, and we will continue doing so in 2023. Of course, we expect the rate decrease to impact our GP in absolute terms, however, we are comfortable with maintaining the GP margin stable for the Freight product. We will be focusing on volumes and maintaining profitability.

Moving to the Logistics product on the following slide. We have provided you with the normalised financial results to really isolate the impact from the strategic repositioning exercise we undertook in 2022, as we refocus this product on quality revenues in line with our strategy. We ended Q4 2022 with US $31 million in revenues [correction: US $30 million]. We have had certain extraordinary items, which we recognised in the fourth quarter and which impacted GP, EBIT and EBITDA for Logistics and for the Group. Q4 2022 normalised GP was US $5.6 million and the GP percentage terms was 19%, doubling compared to the same period in the previous year.

Normalised EBITDA was US $7.7 million and the EBITDA percentage was 26%, both significantly improving over the previous year. We also recovered our EBIT percentage, reaching a 6% normalised margin and bringing it back to profitability. Going forward, we will not be providing anymore normalised figures for the Logistics, as we are reaching the conclusion of the strategic repositioning of this product.

For the full-year period you will see a similar trend. Revenues were stable, however, the quality of revenue has changed, as we move to more profitable accounts. Which is evident in our gross profit growth, which is up 62% for the year, and in our profitability profile, with a significant improvement in EBIT and EBITDA margins as well.

Let's move to the Group level. At Group level we reported revenues of US $418 million in Q4 2022, compared to US $439 million in Q4 last year. The drop in Domestic Courier and International Express was partially offset by growing contribution from Freight, while Logistics business remained stable. It is worth noting the impact of foreign exchange currencies on our business, particularly on the Domestic product. For the fourth quarter period US $13.6 million is attributed to foreign exchange losses for the Domestic product revenue when comparing to Q4 2021 exchange rates. The total for FX impact on revenues in Q4 22 was US $22 million at top line level.

Moving to the next slide. Thank you. For Q4 22 we have had a good contribution to revenues from GCC, MENAT and America, while Africa and Europe remained stable. We have previously discussed the performance in North Asia, China, for Express, and Oceania, as well, for the Domestic business. We are improving the summary performance per region. As Othman mentioned, we are now well-diversified across customers and geographies, with good exposure to the GCC and MENAT region, which has a favourable economic outlook which is driving a good performance in our outbound market, especially Europe and US.

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Aramex Q4 2022 results conference call	Thursday, 16 March 2023

Speaking of the US, or America, you will note a significant bump in our results for the Q4 period. Please bear in mind that US financials have been consolidated with our US regional financials. Of course we remain cautiously optimistic as we face a dynamic microeconomic environment across all these regions. We have challenges associated with FX and inflation, and we have seen the foreign currency significantly impacting our result negatively. However, we benefit again from good consumer demand originating in the GCC and broader region, while our operational enhancements will help us grow in an efficient and profitable manner going forward. Our business is well positioned to navigate the current market environment.

For a summary of our Group result for the reporting period of Q4 and full-year 22, we have discussed revenue drivers and performance, we close the year at US $1.6 billion of revenues, which is relatively stable compared to 2021, and US $418 million for Q4 22, which was impacted by the decline of the Courier product. For the gross profit and net profit, we provided you with both reported and normalised financials to facilitate a like-for-like comparison. For the year 2022 the normalisation was calculated excluding the financial result and performance from MyUS, the cost of its acquisition and certain other extraordinary items, mostly associated with the Logistics product, as we discussed previously. For 2021, financials were normalised to exclude the gain from the sale of InfoFort and certain other extraordinary items.

Normalised GP was up 6% for the fourth quarter and was stable for the full year, while the gross profit was maintained stable at 24%. Our focus on efficiencies and cost management has helped us improve our SG&A structure. Total overheads were US $322 million in 2022 versus US $320 million in 2021. As a percentage of revenue SG&A was 20% in 2022 and 19%, almost similar, in 2021. This stability is very important and we believe our organisation is geared to sustain future growth and at the same SG&A structure going forward.

We ended the year with a normalised net profit increase of 42% in Q4 2022 and an increase of 9% for the full year. Excluding the foreign currency devaluation impact, revenue and net profit for the quarter would have been higher by US $22 million and US $5 million, respectively, compared to Q4 2021. The impact for the full year of this FX devaluation was US $59 million on revenue and US $9 million on net profit. We expect to see currency volatility in the coming quarters as well, and are taking appropriate measures to manage currency risk.

The following page, you will see our balance sheet that remains strong and healthy. We have taken on debt to fund the MyUS acquisition and it's worth noting that we still have an advantageous gearing ratio. Our net debt to EBITDA ratio, excluding IFRS 16 impact, is 1.5x. We are ready to accommodate future growth as we pursue our M&A agenda.

On the following page we would like to draw your attention to our free cash flow evolution. We have had a good improvement in 2022 with normalised free cash flow of US $86 million. Reported free cash flow was negative due to the consideration paid for the acquisition of MyUS. With this, I will now hand back to Ahmed to open the Q&A session. Back to you.

Ahmed Moataz Thank you very much. To all participants on the call, if you wish to ask questions you can either send them through the Q&A option or you can use the raise hand function. We'll take our first questions from Thomas Mathew. Please go ahead.

Thomas Mathew Good afternoon. Thanks for the call. I have a couple of questions and I'll start off with the Express and Shop n Ship segment. Just want to know how we should look at the average revenue per shipment and

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