Aramex : Q3 2021 Investor Call Transcript

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ARMX Q3 2021 Investor Call-202111091304-1	Tuesday, 09 November 2021
Ahmed Hazem Maher	Good morning and good afternoon, ladies and gentlemen. This is Ahmed

Hazem from EFG Hermes Research. We'd like to welcome you all today to the Aramex 3Q 2021 results conference call. With us on the line today is Mr Othman Aljeda, CEO of Aramex, Mr Arun Singh, acting CFO, Mr Mohammad Alkhas, COO of logistics, and Mr Alaa Saoudi, COO of express, and Miss Anca Cighi, head of IR of the company.

Today's call will include a presentation on the results, followed by a Q&A session. And without further delay, I would like to hand over the call to Anca. Please go ahead.

Anca CighiThank you very much, Ahmed. Dear ladies and gentlemen, good day to everyone, or good afternoon, and thank you for joining our Q3 2021 investor call. Our financial results were

published on Sunday and you may have had a chance to read our material for the investor presentation already. With that in mind, we'll kick off today's meeting with a summary of our financial results for the period, presenting by our CFO.

And after this, we'll go straight into the Q&A session, where our executive leadership is available to answer any questions you may have. I will just double-check now that everyone is able to see the presentation. Ahmed, is it being displayed or should I reshare?

Ahmed Hazem Maher	Yes. The presentation is visible now.
Anca Cighi	Perfect. Before I begin, I would like to draw your attention to slide number

two of our investor presentation. Please bear in mind that some of the comments made on this conference call today may be forward looking statements. These are based on our best view of our 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. With that, I will now hand over to our Chief Financial Officer. Please go ahead, Arun.

Arun SinghThank you, Anca. Good afternoon, good evening. I would like to welcome you all on this call and thank you for taking the time to join this conference. I will take a few minutes to provide a general business update and what we've been busy with, as a team, as a company. The third quarter has been different than the last two quarters of this year, and completely different than the third quarter last year. Most countries, if not all, are open for travelling, people are flying again.

Shopping malls are open, people are back in the malls, making their purchases. Physical events are taking place and people are attending. This is in complete contrast to what we have seen in the third quarter last year when we had complete lockdowns in many parts of the world and in most of our co-markets as well. During this quarter, we still had lockdown related challenges in some of the places, like Oceania, which pushed our cost higher.

This quarter, another major update we had was the sale of InfoFort which was concluded.

As you know, the current management team, starting with the CEO, Mr Othman who was appointed CEO in June this year, undertook a business review exercise.[…]

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ARMX Q3 2021 Investor Call-202111091304-1	Tuesday, 09 November 2021

We split our business [internally], in terms of the operations, between express and logistics. Two new COOs were appointed to lead each of those verticals. So, we have Mohammad Alkhas and Alaa Saoudi on the call with us. Under the previous design, what we changed was the whole centralisation concept. So, a number of themes were centralised in the previous design, which we believe, unfortunately, had a negative impact on our overall performance since last year.

So, we formulated a plan, under the guidance of Othman, and we started implementing it. We worked on changing the team structure, as we have communicated to you before. We divided our geographical footprint into eight regions. We've worked on dismantling the centralisation structure, we made changes in the regional and local management of various entities. It took a few weeks for us to mobilise the right resource to each of those places.

We were focusing on making sure that the revenue and cost ownership were connected again with greater responsibility and ownership given back to the people on the ground. In line with the decentralisation, we've shifted back a number of roles to local entities. We've terminated the ones that are no longer required.

Some of that cost is also reflected [in our results for the period], the cost of termination of a number of our employees who were no longer required as part of the decentralisation process. We are increasing the level of specialisation for our people on the ground, especially our salespeople, to enable them to focus on each of the products, such as express, freight, and logistics, and the results have started to show now.

We have also started focusing on the SME business, which forms the majority of the business sector across our key markets. We'll be focusing on, for example, aggregating the SME volumes and businesses, which deliver a better lead and better margin. In key markets, such as KSA, we identified a number of areas for improvement within the business.

We focused on logistics, on freight, and looked at the ongoing activities. We formed multiple teams that are working on each of the areas where we thought the changes could be done. We are reviewing our delivery capacity in key markets and looking at, for example, what kind of rates we are selling them at and how can we improve our rates. For example, the bank business, especially during COVID, was being acquired at low rates.

We're trying to revisit such contracts, possibly revise the rates for a better margin. However, I must say a word of caution, it is too early to give any sort of guidance on any percentage increase for the next quarter just yet. It is early days, after such a major change that we have undertaken in the last three or four months, but we have started getting very positive signs of a turnaround in the activities that we're undertaking with very promising growth in some of the areas.

Recently, you would have also read about some of our investments - - we opened up a state-of-the-art facility in Riyadh. We will continue to be bullish around investments in our key markets, such as Saudi and Egypt. We will continue to invest in our infrastructure, digital solutions and last mile capabilities, while focusing on our customers.

Recently, as you may have read, GeoPost, the express parcel arm of the French group La Poste, acquired 24.9% shares in Aramex through the open market. GeoPost has been a longstanding commercial partner of Aramex. It is a

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ARMX Q3 2021 Investor Call-202111091304-1	Tuesday, 09 November 2021

very positive sign for our business that they have become a strategic shareholder. We believe that over the long- term, all our shareholders are set to benefit from having GeoPost as a strategic investor.

This investment reaffirms Aramex's leading position as a key enabler of both global trade and e-commerce, especially at a time when the industry is benefitting from a post COVID recovery, as evidenced by accelerated growth in economic activities across various industries. In early September, we communicated that we were in the early stage of due diligence with MNG Kargo.

There is no material update on progress that we have at the moment, that we can communicate on this call. We will be communicating, as appropriate and once approved by the Board, on any of the progress that we may have and we will share that with you in due course.

Talking about the business performance, a lot has changed since last year, when we were in the peak of COVID. We were able to charge an emergency surcharge last year in a number of our key markets.

The number of COD (cash on delivery) shipments was still high, compared to the current year. Unfortunately, a lot has changed since then. There is no longer an emergency surcharge that we're able to charge. Compared to last year, the number of prepaid shipments is higher. All this has an impact on the margin profile. There is a constant move towards a higher number of prepaid shipments versus COD shipments, as consumers have adapted to buying online. They are more comfortable with the online payments and they are trusting the e-tailers with repeat purchases.

Airline capacity is gradually coming back, but the rates have not necessarily returned even close to the pre-COVID levels and that continues to impact our margin. With the current asset light model, we continue to weigh in on our cost structure, compared to some of companies that you may see in the market, which may have a different asset profile.

Talking about the quarterly results, compared to Q3 last year, this year, revenue is flattish. We did have a good Q3 last year when July was extraordinary. Whereas this year, we had a tough July and August. If we compare Q3, this year, let's say, for example, to 2019, which was the pre-COVID year, it [revenue] was up almost 19%. So, in terms of building up the top line, we're doing a fantastic job.

In Q3, we had volume growth in six out of eight markets. Growth in America, Europe, MENA, GCC, South Asia, and Oceania. A couple of regions saw the volume decline, which was in North Asia, Sub-Saharan Africa, and South Africa. On a year-to-date level, we had volume growth across all regions, except North Asia. International express revenue decreased by 16% from $194.8 million in the third quarter 2020 to $164 million in the third quarter 2021.

Domestic express revenue increased by 13% from $95.4 million last year quarter three to $107.3 million. Courier revenues decreased by 6% to reach $271.6 million for Q3 2021 from $290 million versus Q3 2020. Talking about the quarter margins, the courier GP percentage dropped by 410 basis points from 32.2% in Q3 2020 to 28.1% in Q3 2021. Freight forwarding GP percentage dropped by 30 basis points from 12.3% in Q3 2020 to 12% in Q3 2021.

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ARMX Q3 2021 Investor Call-202111091304-1	Tuesday, 09 November 2021

Logistics GP increased by 20 basis points from 12.4 in Q3 2020 to 12.6% in Q3 2021. And this was, for example, one of the signs where I said when we reviewed some of the activities that we were doing and we are starting to see a turnaround in the activities, and logistics is, for example, one of them. Others GP increased by 440 basis points from 59.8% in Q3 2020 to 64.2% in Q3 2021. Overall GP decreased by 340 basis points from 27.8 in Q3 last year to 24.4% in Q3 this year.

Overheads in total during the third quarter this year increased by 6% to $79 million compared to $74.4 million in Q3 2020. Our selling increased by 12% and G&A increased by 5%. One thing I would like to bring to your attention is last year was an extraordinary year where we had deployed a number of cost containment issues.

We had government subsidies and all of that impacted on a lower SG&A, whereas this year, we restarted a number of activities, which came to a complete halt last year. For example, we had completely stopped advertising, which has restarted this year. We are spending money on advertising globally, and also, in the Oceania region where we undertook a major rebranding exercise. There were a number of steps that the centralisation process undertook in 2020.

The salary costs built up, which has now started to reduce after the decentralisation effort that we have taken.

Another cost element where we spent money was M&A activities, employing the advisors and different firms, in order to complete those tasks for us and you see an impact on the SG&A cost.

Overheads as a percentage of GP increased to the level of 81.5% during third quarter from the level of 66.9% in the third quarter of last year. We addressed the increasing headcount, as I've just explained, in SG&A, which was the result of centralisation. And if I compare the second quarter versus the third quarter, there's a reduction of 6% in the salary cost as a result of the steps we have undertaken. And we expect this to improve in Q4 2021.

Our EBIT declined by 19% at $18.5 million in the third quarter 2021 from $22.9 million in the third quarter 2020, while EBIT margin dropped to 4.7% compared to 5.7% in Q3 2020. Excluding the Beirut insurance refund in 2021 and non-recurring provisions in 2020, EBIT has declined by 55% at $16.7 million in the third quarter 2021, compared to $37.3 million in the third quarter 2020. The EBIT margin would have been 4.2% in this quarter, compared to 9.3% in Q3 2020.

The net income increased by 47% at $18.5 million in the third quarter 2021 from $12.6 million in the third quarter 2020. While the net income margin increased 4.6% compared to 3.2% in Q3 2020. If I exclude the InfoFort gain and Beirut insurance refund in 2021, and non-recurring provisions in 2020, net income would have declined at $8 million in Q3, compared to $27 million in Q3 2020. The net income margin would also have declined, compared to the quarter last year.

Talking about the year-to-date results, the international express revenue has increased by 12% versus the same period last year. Domestic express revenue has also increased by 14% versus last year. The courier revenues have increased by 13% versus last year, the same period year-to-date. International and domestic express volumes have increased by 13%, compared to year-to-date last year. While in core markets, domestic e-commerce volume also increased by 13%.

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ARMX Q3 2021 Investor Call-202111091304-1	Tuesday, 09 November 2021

Freight forwarding revenue increased by 16% on a year-to-date level versus last year. Our logistics revenue also increased by 17% versus September year-to-date last year. The aggregate revenue for September year-to-date increased by 14% versus September year-to-date last year, which was at $1.2 billion. The GP margins at the year-to- date level, the courier GP margin dropped by 470 basis points from 33.4 to 28.7 this year.

Freight forwarding GP dropped by 280 basis points from 14.5 to 11.7 this year. Logistics dropped by 290 basis points from 14.9 to 12% this year. The others GP increased by 310 basis points. The overall GP decreased by 400 basis points from 28.8% in September year-to-date last year versus 24.8% to September year-to-date this year.

Overheads in total during September year-to-date increased by 13% to $237 million, some of the factors, I discussed, and we can discuss in detail later on, compared to $210 million in September year-to-date 2020. The selling increased by 31% and G&A increased by 8% out of this. Overheads as a percentage of GP increased at 79.1% this year from the level of 68.6% in September year-to-date last year.

The EBIT declined by 20% year-to-date this year, while the EBIT margin declined to 5.5% from 7.9% last year. On the balance sheet side, we continue to hold a very robust balance sheet with a very strong cash balance of $313 million on the balance sheet date. A pretty unlevered situation still and giving enough headroom to carry out any acquisition related activities. With this, I would like to conclude on the financial update and the business update and give you an opportunity to ask us the questions that you may have. Thank you.

Anca Cighi	Thank you very much, Arun. Ahmed, over to you to open the floor for the
Q&A, please.
Ahmed Hazem Maher	Thank you, Arun, thank you, Anca. Hi, everyone. Just as a reminder, you can

use the raise your hand function and I can unmute your mic, or you can send your questions in the Q&A box. I think, just to give time to people to raise their hands, Anca, I think we have a couple of questions in the Q&A box, if you'd like me to read them, or you can read them yourself. Anca?

Othman AljedaLet me take the first one, Anca. The first one is about our engagement with GeoPost and any expected synergies and efficiencies. Good afternoon, everyone. Our relationship with GeoPost goes back to around ten years. We started this relationship in the UK where they acted as our delivery partner within the UK. And over the past ten years, we've had a very strong collaboration where we sold international outbound to their domestic customers.

And this, over the years, was very fruitful. We ended up with around $50 million of revenue. Now, just to give you some context, GeoPost is one of the largest European operators. They are extremely domestic in Europe. They have always looked at us as a strong cross-border partner, and we've engaged with them over the years, cross-border within Europe and mainly into the Middle East. Now, on the back of this, we started discussing other opportunities into this area.

We are looking at opening up Germany, we're opening up France, Spain, and other European markets for cross- border, and that's how the relationship started. Now, GeoPost, over the last few years, has also been expanding in other areas in the world. They've acquired a substantial stake in Ninja Van in Southeast Asia, they've acquired a

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