Modern Mills’ financial position robust, records highest market share: CEO

Osama Ashi, CEO of Modern Mills Co. (MMC)

Modern Mills Co.’s (MMC) financial position is robust in terms of profit and financial performance, CEO Osama Ashi told Argaam.

He added that the firm achieved the highest increase in its market share compared to peers, recording an approximately 24% market share in 2022 compared to 20% a year earlier. It also dominated nearly 7% of the Kingdom's feed market in 2022.

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Modern Mills plans to launch new value-added products such as ready-made mixes and obtain a flour export license to reach new geographical areas. In addition, the company seeks to expand its production lines to double the production capacity in Al-Jumum factory. The expansion is expected to complete in the first quarter of 2025.

The company’s level of debt is low, as the ratio of net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) reached 2.3x as of June 30, 2023.

Ashi highlighted the details of the company's production capacities, pillars of strategy, and the expected growth in business.

Q: Could you tell us about the company and products offered to the markets and consumers?

A: Modern Mills is a leading company in the field of flour, feed, and animal bran production, and a major player in the food and animal security system in Saudi Arabia.

The company provides its products to various customers, as it supplies its flour products to bakeries, the industrial and hotel sectors, restaurants and cafes, and retail stores. It also supplies feed and animal bran to a number of clients in the livestock sector.

Q: How many modern mills does the company have and their locations? How about the production and storage capacity?

A: Modern Mills has well-established operations in the Western, Southern and Northern regions through three factories in Al-Jumum, Khamis Mushait, and Al-Jouf.

Al-Jumum factory was established in 2015. Its daily wheat production capacity is 1,200 metric tons, and silo capacity is 125,000 metric tons.

The expansion of Al-Jumum facility is expected to complete in the first quarter of 2025, where a new grinding line will be added with a daily production capacity of 1,250 metric tons per day, which is the largest production line in the Kingdom.

Al-Jumum plant is considered the “gold standard” for factories, as it is equipped with the latest technologies and is the closest flour-milling factory that serves the growing demand in the Western region for Hajj and Umrah.

The Khamis Mushait factory was established in 1982, with a daily wheat production capacity of 1,650 metric tons, and silos capacity of 40,000 metric tons.

Upon completion of the factory expansion, expected in the first quarter of 2025 after obtaining regulatory approvals, its daily wheat production capacity will reach 1,800 metric tons. The daily feed production capacity at the Khamis Mushait plant is 1,400 metric tons, which is the highest level in the Kingdom.

Meanwhile, Al-Jawf Factory was founded in 2008, with a daily wheat production capacity of 600 metric tons, and a silos capacity of 20,000 metric tons.

Q: What are the pillars of the company's strategy to grow and maintain its competitive position in the flour, feed and animal bran segments?

A: The company's growth strategy is based on four key pillars. The first is boosting the capabilities of the current infrastructure to contribute to food security and acquire a greater share in the flour and its derivatives sector. This includes completing the expansion of Al-Jumum plant, which is expected in Q1 2025, where an additional grinding line will be installed with a daily production capacity of 1,250 metric tons per day, which is double the current capacity. The company will also upgrade the three production lines in the Khamis Mushait factory to raise the production capacity from 1,650 to 1,800 metric tons per day, after obtaining regulatory approvals, in addition to boosting the use of the capacities allocated for feed production through improving the factory’s efficiency.

The second factor is investing in employees and technology, as well as enhancing environmental, social and corporate governance (ESG) practices. This includes the continuous investment in recruiting and training employees, empowering Saudi youth, and increasing women’s participation in the workforce, in line with Vision 2030 goals.

In addition, the company promotes the ESG agenda through adopting health, safety and environmental practices that encourage the use of environmentally-friendly materials, waste treatment and compliance with ISO standards. This is in addition to the continuous efforts to raise awareness of food waste in partnership with the General Food Security Authority (GFSA) through adopting the best corporate governance practices. The company also continues to invest in technology and digital transformation to drive further operational improvements.

The third pillar is the expansion into new products and adjacent categories, as Modern Mills continues to develop research and development capabilities, including, for example, purchasing a large industrial mixer to launch new value-added products such as ready-made mixes, as well as increasing profit margins in the current categories and expanding into new channels and categories.

The fourth pillar is access to new geographical areas through obtaining a license to export flour and taking advantage of the proximity of the current facilities on the southern and northern national borders to nearby markets. In addition, the company seeks to expand exports of feed products outside the GCC region to global markets.

Q: How much have your market shares grown in these sectors?

A: Modern Mills achieved the highest flour market share growth, as it recorded a market share of approximately 24% in 2022, compared to 20% a year earlier. It also dominated nearly 22% of the market value, compared to 18% in 2021.

The company enjoys a leading position in feed production with a capacity of 1,400 metric tons per day, as it produces compound feed for both livestock and poultry. It ranks fourth in the compound feed market, accounting for around 7% of feed production in 2022.

As for the animal bran, the company took the lead in adjusting prices in 2021 to align with global market prices. The step led to an increase in profit margins in this category, helping the company secure a leading position.

Modern Mills' scale advantages helped it lead and scale across various markets in these key segments. The company offers a comprehensive range of products across a variety of price points that meet various needs for industrial use, bakeries and home consumption.

The company seeks to enhance its product portfolio, with an increased focus on research and development to improve the value offered to customers, achieve higher profit margins, and expand into new product categories.

Q: What factors will contribute to the growth in product sales in the Kingdom over the coming years?

A: There is strong and growing domestic demand for the company's core product categories, flour, feed, and bran, and they will likely increase at a compound annual growth rate (CAGR) of 3.2%, 4.6% and 2.9%, respectively, from 2022 and 2030.

On a standalone basis, the local flour market value is predicted to grow at a CAGR of 4.4% from 2022 to 2030. Meanwhile, the market size will likely reach approximately 4.4 million tons by 2030, through various growth channels in bakeries, hotels, restaurants, cafes, food manufacturers, and retailers.

This increased demand is based on positive macroeconomic expectations in Saudi Arabia, driven by population growth, government policies, investments, and an increase in disposable consumer income. This is because Vision 2030 stimulates investment in food security and the development of the tourism sector in the company’s main regions - the Western and Southern. This is part of plans to invest $810 billion in culture and entertainment projects over the next 10 years.

The Kingdom's population will likely increase at a CAGR of nearly 2.5% between 2022 and 2030, reaching approximately 40 million. Consumer disposable income in the Kingdom is also expected to rise at a CAGR of 4.7% from 2022 to 2030. Accordingly, this will stimulate demand and the company's sales.

Q: What scenarios will face the company face when the government wheat subsidies end? How will the company ensure the sustainability of its business growth?

A: Modern Mills' portfolio includes a diverse product range, including regulated and unregulated products, across its three product categories, flour, feed, and animal bran.

The company purchases the main raw material (wheat) from its main supplier, GFSA, which is the competent regulatory body in the Kingdom that sells wheat to the four milling companies at a government-subsidized price. The wheat flour market is subject to a high level of regulation and localization, as the government supports all producers and consumers until mid-2025. By 2025, there may be no change in the current subsidy system or it may be lifted gradually or completely.

The company seeks to sustain the growth of its business based on a clear strategic approach and diversified portfolio, which includes non-subsidized products, namely feed and bran, and the company enjoys a leading position in both.

Q: How was the company’s financial performance during the past period? What is the contribution of segments to revenues and profit?

A: The company has a distinguished financial position in terms of profit and financial performance, as it recorded revenues of SAR 978 million and EBITDA of 33% in 2022. The company maintained its revenue level in 2023, logging SAR 452 million in the first half of 2023, which is approximately H1 2022 revenues.

Modern Mills has a flexible financial position, without any accounting goodwill, and a low level of indebtedness. The ratio of net debt to EBITDA margin reached 2.3x as of June 30, 2023. The firm operates a cash-generating business model that contributes to low working capital requirements from future cash flows.

Q: What is your message to new shareholders?

A: We welcome our new investors, and thank them for their confidence in our pioneering operating model, solid investment components, growth strategy, and diligent work team.

We affirm our efforts to achieve further growth through our clear strategy, which focuses on enhancing our market share across our three product categories, in addition to continuous investment in workforce and technology. In addition, we seek to expand our product categories, boost geographical expansion into new regions, and enhance our business profitability in sectors that provide opportunities in the final stages of the production chain.