Aramex : ARMX Q2 2022 Investor Call

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ARMX Q2 2022 Investor Call -	Thursday, 11 August 2022
20220811 1302-1
Redacted for factual accuracy

Ahmed Hazem: Good morning and good afternoon, everyone. This is Ahmed Hazem from EFG Hermes Research. We'd like to welcome you all today on Aramex's second quarter results conference call. With us on the line today is Mr Othman Aljeda, CEO of Aramex. Mr Nicolas Sibuet, CFO, Mr Mohammad Alkhas and Mr Alaa Saoudi, COOs of Logistics and Courier Express businesses. As well as Anca Cighi, the Investor Relations Director. Without further ado, I'd like to hand over the call to Anca. Anca, please go ahead.

Anca Cighi: Thank you very much, Ahmed. Good afternoon to everyone. Thank you for joining our investor call. Our second quarter financial results were published today and all materials are available on our IR website. We will run through the presentation, after which we will open the floor to you for the Q&A session.

Just briefly, if you can move on to slide two for our usual disclosure. Some of the comments made on this conference call today may be forward-looking statements. These are based on our view of 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 the call to Othman. Please go ahead, sir.

Othman Aljeda: Good afternoon, good morning, ladies and gentlemen. Thank you for joining our financial result call. I hope everyone has kept well and healthy since we last spoke in May. Let's dive right in. Q2 was a challenging quarter. Our courier business was impacted by the e-commerce normalisation and the macroeconomic conditions, which led to a decline in volumes. We have seen volumes decline across the industry globally and ours are in line with the global trends.

However, we are particularly impacted on the bottom line, as you would have seen from the EBITDA and net profit results. We've worked very hard to keep GP margins stable and we're ramping up activities to grow quality, revenue, and focus operation efficiencies. This is very important. Despite the challenges, we remain focussed on our strategy rollout and I'm pleased to report good progress in this regard. We had 32% growth in our freight business and 3% growth in logistics. Our investment in people and added specialism in these two respective businesses are delivering returns.

Freight was up 71% in gross profit, with a margin of 13%, while logistics tripled its GP with a margin of 25%. In the short-term it's all about protecting margins and growing through quality revenue. In the medium-term there is a lot of growth to unluck. The courier business will remain an important and key driver for Aramex. The team is working very hard and we're ramping up activities. We're expanding our return product and continue to roll out the premium product we talked about last quarter.

Our last mile operation is stronger. We've increased our PUDO network in the GCC by 22% compared to Q1 this year. We continue investing in technology and automation, such as new sorters installed in Egypt. With more detailed analytics, insight and live visibility of our couriers, we have improved courier efficiency by almost 15%. We have gamified the experience for the couriers. Each driver now has access to what we call champion self-performance dashboard on their app, and he can see his own performance, visibility and customer rating.

Our partnership with DPD is progressing very well. We have just recently opened more lanes from Italy, Germany, France and the Netherlands. The MyUs acquisition is progressing well also, we're very close to closing. We are very

Issue 1.0 12.08.2022

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ARMX Q2 2022 Investor Call -	Thursday, 11 August 2022
20220811 1302-1
Redacted for factual accuracy

excited about this acquisition, it will be the largest we have made to date, and it will bring good value to our business, our customer and, of course, is value-accreditive to our stakeholders. More details on the financial profile of MyUs will be shared with you after we close.

Moving to slide seven. Alongside our financial results, we have also published today our first sustainability presentation. This is available on our website. If you're interested to find out more details, please get in touch with Anca, who can arrange a separate session on this. Earlier in June we received confirmation from the FTSE4Good, that we have been added to their index.

Moving to slide eight, we have prepared a short summary of our key investment highlights, as we see them today. I believe everyone on this call is quite familiar with our business, so I will not go through these one by one. I would like to focus on a couple of these points. Our growth prospects are good. We have recently reviewed our strategy and business plan to account for the new macroeconomic conditions we are in.

We have run various scenarios. We remain very confident in our prospects and we will grow at a faster rate in the market. We have a great business with good exposure to emerging markets and high-growth verticals, where we have the right capabilities to win. Our end-to-end service offering across courier, freight, warehousing and supply chain is a distinct competitive advantage and a unique capability in many of our key markets. This integrated approach is valuable for our clients, driving quality revenue for us and greater operation efficiency for our customers.

You've heard us talk a lot about our investment in technologies. This plays a significant role in achieving good service offering and driving operational efficiencies in our business. There is a lot of value to unlock. We are very excited about these projects that we are running. Our ultimate focus is on profitability and returns. I'll now hand over to Nicolas for the financial review section.

Nicolas Sibuet: Thanks, Othman. Hello, ladies and gentlemen. It's a pleasure to speak to you this afternoon and thank you for joining the call. Let's start with our key group highlights on slide ten. On revenues, we reported AED 1.52 billion in revenues in Q2 2022 compared to AED 1.57 billion in Q2 of last year. A few factors impacted our revenues this quarter. We are seeing a volatile and changing macroeconomic environment, driving by the increase in inflation, devaluation of currencies and consumer behaviour adapting to this new reality.

Of course, the softness in e-commerce activity globally has resulted in volume declines for express players and for us, as well. Last year's lockdowns boosted e-commerce activity, while this year, life is back to normal and travel has resumed. In our North Asia region, we continue to see a significant lower volume flow and our volumes in this region were down 56% in Q2 this year compared to last year. Competition remains tough, especially in the Middle East, in particular, with new entrants on the express side and several small players still competing on the domestic front as well.

These factors make it even more important for us to focus on our operational processes and execution, our product specifics, and also, on quality revenue. We are executing profitable contracts across all business lines and we are seeing this reflected in our Q2 results and gross profit margins.

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ARMX Q2 2022 Investor Call -	Thursday, 11 August 2022
20220811 1302-1
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On profitability, we reduced our cost of services by 4%, as we focus on operational efficiencies, and this has helped us to report a gross profit of AED 370 million in Q2 2022 and a gross profit margin up 25%, which is stable compared to 24.7% gross profit margin in Q2 last year. As you know, our focus is after the margin recovery phase, but also now, going to stabilisation or growth of these gross profit margins, depending of course on each one of our products.

Our overheads increased by AED 8 million. It's important to note that our EBITDA performance this quarter was impacted by a few non-recurring items, such as the recognition of M&A-related transaction costs, salary and benefits increases to support our workforce exposed to inflationary pressures, as well as cost related to the repatriation of cash. Without this impact, our EBITDA performance would have been in line with Q2 of last year.

We also recognise AED 11 million in other expenses, which mainly consist of growing currency losses, mostly coming from Europe, GBP, Egyptian pounds and the write-off of discontinued technology applications. The impact of these non-recurring items go straight to net income. We closed the quarter with AED 45 million positive net income. Moving to next slide, please, slide 12.

We will be focussing here on the courier segment. We reported AED 936 million in revenues in Q2 this year compared to 1.1 billion in Q2 last year. On the express side, an 18% reduction on volumes resulted in a 20% drop in express revenues in Q2 this year compared to the same period last year. This is primarily driven by North Asia, where we saw a 56% drop in volumes and a 47% drop in revenues. It's worth noting that sequentially, our volumes and revenues for the express business increased in Q2 2022 compared to Q1 2022. If we exclude impact from North Asia business, our revenue per shipment for the express product improved in Q2 2022 compared to the same period last year. In terms or pricing for the express business, we're seeing pressure from fuel price increases and inflation, as well as the devaluation of certain currencies.

Moving to the domestic product. Our domestic product has been more resilient. We delivered 24 million shipments in Q2 this year compared to 26 million shipments in Q2 last year. The decrease in volume is coming mostly from Oceania, where we saw a 17% decline in volumes and a 9% decline in revenues. We have previously discussed the Oceania business and noted we have pressures there from inflation, increases in fuel price, increase in leasing cost, and we are expecting to see the benefit of the turnaround plans that we have put in place in 2023. We are seeing a good trend in our revenue per shipment for the domestic product, due to our focus on driving quality business.

Group domestic revenue per shipment improved this quarter, mainly resulting from our focus on pricing and passing prices to the end client to protect our margins. Obviously our operating cost per shipment is impacted by the macro factors discussed just now. The change in exchange rates in Lebanon, Egypt and England also impacted our courier performance. Going forward, we will continue to focus on managing our revenue and cost per shipment dynamically. There are lots of activities driving this, as you have heard from Othman. Moving to the next slide, please.

On freight forwarding, volumes are increasing, especially on air freight, which is the core of the Aramex historical competency. Land freight has also improved, while the decline you see in sea freight is mostly due to industry capacity constraints. Growth is coming mainly from the UAE and KSA with good addition from across the network. From high-growth verticals, such as oil and gas, retail, pharma and SMEs. Gross profit margins increased to 13% and EBITDA significantly improved to 6% from 2% in Q2 last year. Margins benefited from the revenue increase, volume

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ARMX Q2 2022 Investor Call -	Thursday, 11 August 2022
20220811 1302-1
Redacted for factual accuracy

increase, allowing more efficient pricing discussion with our transportation providers, as well as benefits derived from economies of scale, as we are growing this business.

We continue to make investment in optimising our digital systems, to build an efficient operation as we continue to grow. Speaking of growth, we will focus on the investment in this segment to announce our global offering. We will provide you with more updates hopefully during the next quarter. Next slide, please.

Let's move to our logistic business. Our utilisation per square meter has increased by 6% compared to the same quarter last year. Growth is driven by GCC, Egypt, Ireland, from retail and e-commerce activities. We are working with top global accounts and e-commerce providers to continue to be a main driver for growth in the GCC region. We are optimising storage methods and consolidating facilities where we are over-utilising warehouses. Our utilisation of facilities has reached above 85% in key markets. We have exited low-probability contract and secured business that are clearly linked to the GP growth that you are seeing here.

We also spoke last quarter about the change in our labour model, moving from an outsourced model to more insourced labour. This support has commenced and are giving good results, giving us better control of our resources and performance, especially in our key markets, UAE, KSA and Egypt. Once again, our focus on quality contracts has resulted in significant improvement of gross profit reaching benchmarkable levels. However, we believe long-term gross profit margins on logistics should be around 18% to 20%. Moving to slide 15, please.

On the regional breakdown, our operations in the GCC, MENAT and Sub-Saharan Africa, South Asia and America have performed well. We are particularly pleased with a gross profit improvement in the GCC, Sub-Sharan Africa, South Asia and the US. We discussed our operations in North Asia and Oceania, which are two regions with the most potential for improvement and a particular focus from the whole management team is the focus to turn it around. Moving to slide 16, please.

Not too many changes on the balance sheet, compared to end of 2021. We maintain a healthy and liquid balance sheet with positive free cash flow and a cash balance of AED 592 million. We will soon be adding leverage to this balance sheet as we complete our first acquisitions this year. Next slide, please.

We look at our ratio. As discussed, gross profit margin remains stable in line with our guidance. Going forward, we will continue to focus on SG&A expenses to unlock value at EBITDA level. We maintain an advantageous low gearing ratio. Our debt-to-EBITDA ratio significantly declined compared to half-year 2021, while our debt-to-equity was 11.5% for the half-year. We are well-positioned to pursue our M&A agenda. We're on the very last days of the closing period with MyUs. We look forward to integrating this business, a very detailed integration plan, including operations, [unclear], IT, finance has been already laid out.

Looking ahead, we remain focussed on process improvement across the group, long-term normalisation of our ETR, as well as improvement in our working capital and free cash flow. As separate note, starting this quarter we are providing more financials in the IR data book. This content reflects our financial statement disclosure in an easily extractable format and provides some of the analysis contained in this presentation. Our IR team will conduct an investor audit over the course of the next few weeks and we will be delighted to get your feedback on our

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ARMX Q2 2022 Investor Call -	Thursday, 11 August 2022
20220811 1302-1
Redacted for factual accuracy

disclosures and activities, so that we can adjust accordingly. Let's start the Q&A session. Ahmed, please open the line to our participants.

Ahmed Hazem: We have a question from Thomas Matthew, he raised his hand. Just as a reminder for everyone, you can use the raise hand function or you can send your questions in the Q&A box. Thomas, your line is open. Please go ahead.

Thomas Matthew: Hi. Thanks for the call and the presentation. I had just one question, actually, two. One, on the Aramex freight forwarding business, I'm just trying to understand the pricing environment that's there in that segment. I understand that sea freight has come down, understandably, in terms of volumes, but your revenues have gone up and air freight has gone up. I just wanted to understand a sense of what's the pricing environment out there and how we could look at that for the rest of the year and probably next year. It's hard to crystal ball-gaze that environment, but what you're seeing as an operator in that segment. That's one.

Number two is on the MyUs acquisition. I'm trying to understand what could be a timeline to when you'll be able to give more information on the transaction? Thank you.

Nicolas Sibuet: Let me take the last part of your question, if you don't mind, on MyUs, then I will leave it to Mohammad Alkhas regarding your question on freight. We're in the very last few days of the closing period. Everything is pretty much ready. We are just expecting a couple of regulatory filings. We are very excited and we will be closing this transaction hopefully within the next few weeks. This is now independent from us and, as I was saying during the presentation, we have a clear plan of integration and we're very, very excited to work with MyUs and combining the Shop and Ship under MyUs offering to enhance our overall profitability in this segment. Mohammad?

Mohammad Alkhas: Thank you for the question. It's everybody's question at this point in time since there's a stabilisation in the current rates, especially for sea freight. These rates, since the COVID rebound happened, there's a lot of logistical bottlenecks that happened around the world, that caused this huge inflation in sea freight rates. The prices are stabilising now, but they will never return to pre-COVID days. The shipping lines waited 30 years to reach this point and they will never relinquish that higher rate that they are making so much money on.

But we can expect softness in the revenue growth rate. Just on the sea freight, but this will be bringing back more volumes and more equipment from the shipping lines to forwarders. We expect that this will maintain our GP margins going forward, but it's very hard to forecast what's going to happen. We expect from the next two to three years, that the shipping prices, especially for sea freight, will come down a bit, but it will never go back to the pre- COVID days. Does that answer your question?

Thomas Matthew: Yes. That's on the sea freight business. On the air freight business, if you can explain the pricing and alignment that's out there, that you are employing with your airlines.

Mohammad Alkhas: The airlines, they are going back. We mostly use commercial airlines and we use some freighter services around the world, it depends on the projects that we're handling, the clients that we're moving freight for. But the more passenger aircrafts come back - and they are coming back very, very nicely - the more

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