Fauji Foods : Transmission of Quarterly Accounts for the period ended September 30, 2023

CORPORATE INFORMATION

FAUJI FOODS LIMITED - DIRECTORS' REPORT TO THE SHAREHOLDERS

The Board of Directors of Fauji Foods Limited is pleased to present the directors' report along with the condensed unaudited interim financial information of the Company for 9 months period ended September 30, 2023.

Pakistan with its large population base is an attractive market for consumer business with an annual consumption expenditure of circa $ 329 bn. Food and dairy are amongst the largest consumer segments. FFL, with its growth trajectory, complete portfolio and strong capability is emerging as a significant player in Pakistan's large and growing consumer market.

Uncertainty in local and global economic environment continues to pose challenges for all businesses. Persistent High inflation led to cost increases, recent arresting of the PKR devaluation provides hope going forward however international oil price spikes coupled with high interest rates, continuous increase in electricity costs and a high inflationary environment are a cause for concern. As a consequence, input costs for raw milk, packaging, utilities etc. continued their meteoric rise in the first 9 months of 2023. Re-application of Sales Tax on an already declining Tea Creamer category in Q2'23 also impacted category volumes.

Despite these challenges, FFL achieved its highest ever PAT positive quarter by posting Pkr 38.5 million as profit after tax (PAT) in Q3 2023. In fact, it was the 7th consecutive month in green by the company. With the 9 month revenue hitting PKR 14.8 bn (+83% over SPLY) and (+20% over FY 2022). The business is well on its way on the turnaround journey.

The commercial sustainability is reflected through improved structure of the P&L as Gross Margins increased from 3.5% 9 months 2022 to 12.3% 9 months 2023, a GP margin improvement of 8.8% driven by improved internal efficiencies. During the 9 months 2023 FFL achieved operating profit of PKR 258 mn vs PKR (1.07) billion loss in SPLY, an increase of PKR 1.33 billion. With a solid turnaround strategy delivering results, the EBITDA which has been on a growth path since Q4`22 surged to PKR 670 Mn in 9 months of 2023 vs an EBITDA loss of Pkr (702) million SPLY, an increase of Pkr 1.37billion.

Net Profit / (Loss)

(PKR mn)

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FFL's persistence with the strategy of Margin Accretive growth and focus on cost efficiencies has brought sustainability to business results. The impact of progress on each of these strategic pillars is captured below:

1. Margin Accretive Growth:
   FFL achieved growth of 83% in Net Revenue during 9 months of 2023 over same period last year (SPLY). This was driven by continued volume growth in UHT Milk (45% vs SPLY), increase in distribution (additional 14,000 outlets) and strong growth of Institutional sales (+147% vs SPLY).
2. Reducing The COGS:
   The topline growth was complimented by improvement in Gross margins which grew by 3.5 times, from 3.5% 9 months 2022 to a double-digit Gross Margin of 12.3% 9 months 2023. Twin sustainability projects of 1 MW solar and bio mass went into production in Q1 and will continue to positively impact energy cost from here onwards.
3. Elimination of Legacy Debt and Interest Cost:
   Q1'23 interest cost of PKR 299.78 mn is essentially what resulted in the loss after tax of PKR (170) mn for Q1'23. On March 8th 2023, the entire debt of PKR 8.0 bn was paid off after completing the other than right equity injection process. The repayment of legacy debt, which was a serious drag on the business performance, now provides a platform to grow the business in a sustainable manner.

Future Outlook:

Looking ahead, the investment in brands and distribution infrastructure should continue to fuel growth. With the legacy debt burden now removed & margin led focus growth will help improve FFL's financial performance even faster whilst introducing new products. The economic uncertainty coupled with high inflationary environment continues to be a challenge & is unlikely to go away in the near future, however the strategy of pivoting to value added portfolio will enable the business to cover the expected inflation through pricing & margin management. We are confident that FFL driven by its vision of "Unleashing Pakistan's promise in everything we touch" will not only build a successful business but leave a mark on the broader national landscape for times to come.

The Board is thankful to the valuable stakeholders and shareholders for their trust and continued support to the company.

Net Profit / (Loss)

(PKR mn)

CONDENSED INTERIM STATEMENT OF FINANCIAL POSITION

As at 30 September 2023

EQUITY AND LIABILITIES

15,378,496,147 14,216,280,730

The annexed notes form an integral part of these condensed interim financial statements.

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