ADF Foods Limited (519183) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the ADF Foods Limited Q2 and H1 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Bhavin Soni. Thank you, and over to you, sir.

Good evening, everyone. I am Bhavin Soni from Orient Capital. We are Investor Relations advisers to ADF Foods Limited. On behalf of ADF Foods Limited, I extend a very warm welcome to all the participants on this Q2 and H1 FY '23 financial results discussion call. Today on the call, I'm joined by Mr. Bimal Thakkar, Chairman and MD; Mr. Shardul Doshi, CFO; and Mr. Devang Gandhi, Chief Operating Officer. I hope everyone has had an opportunity to go through the investor presentation and press release that we have uploaded on the exchanges and company's website. Before we begin the call, I would like to give a short disclaimer. This call may contain some forward-looking statements, which are completely based on our beliefs, opinions and expectations as of today. These statements are not a guarantee of future performance and involve unforeseen risks and uncertainties. With this, I hand over the call to Mr. Thakkar for his opening remarks. Over to you, sir.

Thank you, Bhavin. Good evening, everyone. I'm pleased to welcome you all to our Q2 and half year ended 30th September 2022 earnings conference call. The demand for our products continues to be strong, and I'm happy with the performance of the ADF team as we have achieved strong and profitable growth. On a stand-alone basis, we recorded revenue of INR 155 crores in half year -- in H1 financial year '23 and INR 83.2 crores in Q2 financial year '23, a growth of 17.3% and 12.8%, respectively, for the same periods last year. On a consolidated basis, we recorded revenue of INR 204 crores in H1 financial year '23 and INR 106 crores in Q2 financial year '23. Our stand-alone EBITDA and PAT for the half year stood at INR 22.8 crores and INR 20.5 crores, respectively. Our consolidated EBITDA and PAT for H1 financial year '23 and Q2 financial year '23 stood at INR 27.1 crores and INR 21.2 crores, respectively. We are showing constant growth and resilience in our overall business despite the supply chain disruption, which we have in our U.S.-based subsidiary that has affected its contribution to our revenue and profitability. The company continues to see inflationary pressures on raw material side and is constantly working on improving cost efficiencies. We have witnessed softening prices of freight costs as compared to last year and this quarter. We are making every effort to maintain our margins despite strong headwinds in raw materials with a better product mix and cost optimization and price hikes taken in the previous quarters. Through our wholly owned subsidiary, Telluric Foods Limited, we are pleased to announce the launch of our brand, ADF Soul in India, which will be sold through e-commerce channels all over India via the company's own e-commerce website, soul-foods.in and various leading e-commerce platforms like Amazon. Currently, we've launched pickles and chutneys in India created with the right balance of healthy olive oil, sweet, less salt and spicy ingredients using traditional recipes. This is just the beginning as we are planning to launch a category of various international gourmet products under this brand. In order to improve our product portfolio and to serve our valued customers, we continue to launch new products in categories of ready-to-eat foods and meal accompaniments like pastes and pickles. Our distribution continues to be on the right track and is helping growth of our own brands as well. To conclude, we are extremely excited to capture all these opportunities, especially the launch of products under ADF Soul in India. This is all from my side for the moment, and I'll hand over to Shardul for the financial update. Thank you. Over to you, Shardul.

Thank you, Bimal. Good evening, everyone. Thank you for joining us today. Let me brief you on the financial highlights for the second quarter. Let me cover the stand-alone first. On a quarterly basis, Q2 FY '23 revenue stood at INR 83.2 crores, which is an increase of 12.8% Y-on-Y and 15.3% quarter-on-quarter. Our Q2 gross profit and EBITDA for stand-alone business stood at INR 47.7 crores and INR 15.5 crores. Q2 PAT stood at INR 13.1 crores with the margin of 15.7%, which is an improvement of 110 bps Y-on-Y and 540 bps sequentially. We are continuing not to book any income on account of PLI incentive for the current year due to change in policy with respect to start year under the PLI policy. On standalone basis, our H1 FY'23 revenues increased by 17.3% to INR 155.3 crores compared to the same period last year. EBITDA stood at INR 22.8 crores, PAT stood at INR 20.5 crores with a margin of 13.2%. The freight cost is showing declining trend, which has continued for September also. However, we are still facing some inflationary challenges on the raw material side. In the current quarter, cost control, operational savings and prudent price increase across select product categories has mitigated the impact of inflationary pressure and improved margins. On consol basis, our top line was INR 106.7 crores for Q2. EBITDA stood at INR 18 crores and PAT at INR 13.6 crores, which is 12.7% margin. For H1, our consol topline was INR 203.9 crores, EBITDA at INR 27.1 crores and PAT at INR 21.2 crores. This is all from my side. We can now open the floor for question-and-answer session. Thank you.

[Operator Instructions] The first question is from the line of Ravi Naredi from Naredi Investment. Please go ahead.

Thank you very much Mr. Bimalji for reasonable set of numbers. Sir, we are doing hard efforts at U.S. and 2 godowns on rent or lease. But since last 2 to 3 years, not growing much in top line or bottom line. So what is your comment? And what do you think for next 1 to 2 years in a line?

So ever since we took warehouses on lease, right, we were hit with COVID and there were disruptions in terms of getting people, setting up that warehouse. We had some challenges and headwinds, but now that's all in the past. And this is an investment which we have made for the future, and it is -- we are very confident that it is going to yield results. And you will see in the coming quarters that things will get much better. Our distribution business subsidiary, which we've set up for distribution also will continue to grow strong. And we've already seen that happen where the indirect benefit is coming on the stand-alone basis because our growth of our own brand through these distribution companies has grown substantially from what it was earlier in the same area. So this is just the initial setting up phase. And unfortunately, we got caught in that during the COVID times. I mean we set up a freezer, we've made an investment on a freezer, but we've not been able -- and it's been now over a year and we were not able to get a transformer. The electricity board doesn't have a transformer to give us so we are still struggling with outside storage. And so there have been some challenges. But now going forward, we will -- we are already now seeing that we are -- hopefully, by the end of this year, we get our freezer started off in the warehouse as well, and things should improve.

Okay. And sir, at what capacity of different locations we are running like Surat, Nadiad and Nashik?

So each -- various lines are running on different capacities. And I'll ask Devang. Devang, if you want to just take that question, please?

So what is happening is that like we said they are all different lines. As far as Nadiad is concerned, we have got basically the majority about 12,000 to 15,000 tonnes, this depends on various products. As far as Surat is concerned, we have got 3,200 tonnes roughly. And as far as Nashik is concerned, we have got another -- let me say about 14,000 tonnes again. This is more because of our chutney capacity there.

Sir, what is our CapEx plan in next 2 years?

Devang, do you want to get that?

Yes, yes. So our CapEx plan in the next 2 years is basically we have a greenfield project that should be in the region of about INR 60 crores. And we would have additional balancing equipment, additional capacity expansions at both Surat -- sorry, at Surat, Nashik as well as Nadiad. And that would be another in the line tune of about INR 10 crores.

The next question is from the line of Prakash Kapadia from Anived Portfolio Managers.

Question from my end. You did mention in the opening remarks U.S. supply chain had an impact on sales. Could you help us quantify the impact of lost sales because I think we had INR 107 crores of consolidated sales. So what could be the impact due to this U.S. disruption in terms of sales for the quarter?

Shardul, do you want to take that?

Yes. So our ADF Foods USA business, which is Nate's and PJ's business, there is a disruption which has happened in fact there are no sales from that business in the first half. In the first half last year, we did almost INR 25 crores of topline and we had earned profits of around INR 3 crores vis-a-vis in this year first half, there is a loss of around INR 3 crores. So there is a profit impact of almost INR 5-odd crores and topline impact of INR 25 crores. So at this business, if you reduce that from the last year, there is a good growth which we have seen in all our other businesses.

Understood. And in a global inflationary scenario, how does demand look like in say, the balance of '23? How does the second half look like if the inflation continues to be pretty high globally. Is there a risk to demand? Because I think now the supply chain in U.S. could have been resolved, right, is what my understanding is.

No. For our subsidiary, we've still not been able to resolve the problem on the supply of products. So the ADF Foods U.S.A. subsidiary of ours, which Shardul just gave you information on, that will still have challenges. We've still not been able to resolve that supply chain. But all the other businesses, we are not seeing any -- we are seeing a strong growth and strong demand for the products. So all the ethnic Indian food, which we are doing from India, the agency businesses, we are seeing good demand on those.

And on the domestic side, how is Soul priced as compared to competition? Is it higher? Is it lower? Is it at par because online is a very price-sensitive kind of a market. How does pricing of our products happen?

So the whole soul value proposition is healthy and tasty products. So it is not priced on the economy. And it is priced for the millennials, and it is at a slight premium. There are lots of other products within the same kind of category, which are there, and they are all on similar kind of price points as those. But they are not an economy or mid-level kind of brand. It is a premium brand. And in the first month we have had good traction on the products. We've had repeat orders. And now we will be going very aggressive with campaigns on Amazon and also launching on other websites as well. But we are very pleased with the initial response that we had. Consumers have come back, rebought. So that is a very encouraging sign.

Right, right. And lastly, from the U.S. business perspective, how -- and what should you give us the trigger, which will ensure and get us a better understanding the worst is over and these issues have been sorted and demand would come back?

So I mean, I cannot see it going anything worse than what we've currently got because the ADF Foods USA subsidiary has virtually given 0 business, and it's only gone negative for us. All the other businesses, we are seeing good growth on them. And so I think the worst is behind us now, and we look forward to a good future now from the U.S. subsidiaries.

The next question is from the line of Kartik Shah, an individual investor. Please go ahead.

Congratulations Bimal and team. You have done a good job basically this quarter. My simple question is, is there any room for spending more on marketing in terms of advertisements, et cetera, because the presence in the Indian market seems to be quite not so visible. And any other acquisitions in the pipeline, if it the CapEx that we have, is the cash we have is quite a lot in the...

So yes, we have not started our ad campaign in the domestic market. You will start seeing activity on social media from this month onwards. And we are committed in investing and know that we have to invest in marketing to get this brand popular in India. So we will do that, and you will see the activity starting off from this month. We just didn't want to launch a campaign last month because it was high season Diwali time and these products wouldn't have really got any kind of impact on push because of the Diwali season. So you'll start seeing the campaigns from this month onwards. And as far as acquisition opportunities, we constantly evaluate and we are always on the lookout. So we will look at that. We definitely want to look at something and hope to get something at -- which is a good fit for us and at the right price.

[Operator Instructions] The next question is from the line of Tushar Shetty from GB Capital Markets. Please go ahead.

So just wanted to know how has been the response to the launch of ADF Soul in India? And how are we planning to scale up?

So I just answered that, Tushar. I mean we've had a very encouraging response, and it's just been 1 month. And we are now with a step up on the marketing activity of that brand in India. So we are very pleased with the initial response that we got on the brand. And there are lots of more products that we will be adding on under this brand.

And what are our internal sales target for the same? Can you share, it would be helpful.

So first financial year, we are looking at -- I mean, it's just going to be 5 months in this financial year. So we're not looking at anything over the top. But next financial year onwards, we are looking at a minimum of INR 1 crore a month to begin with. So this is all online, okay? And after we've established that, then we want to look at getting into modern trade. So first full year, which will be next financial year, we should be looking at least about INR 12 crores minimum.

Okay. This is helpful. And the second question is, the growth in quarterly revenue for the distribution business has remained flattish. So could you help us throwing some light within?

Sure. So one of the core agency brands that we have, which is the Unilever teas, right, has undergone some changes where Unilever internationally -- I mean, globally has sold those brands to a private equity firm. So I mean, we now are working with that private equity firm for managing distribution. And there were some disruptions during that whole transition, which is why there was a flattish sale. But now from next year -- I mean, everything is now resolved. And from Jan onwards, you should start seeing again a good growth trajectory. So there was a transition period between the sale process. So that led to some slowdown for us.

Okay. And this quarter reflect the sales made for Patanjali. Have we onboarded them in the last quarter?

Yes. Patanjali has started off for us, and we are pretty much on target to achieve our half a million pound target for the first year. We've not yet -- we have just launched it in U.K. We are now in the process of launching it in some other European countries as well. But yes, so this quarter does reflect the Patanjali sales as well.

The next question is from the line of Anupam Agarwal from Lucky Investment Managers. Please go ahead.

Congratulations on good numbers. I'll start off, if you can help us understand the freight cost during the quarter as a percentage of sales, how much would that be? And what is the kind of variation we have seen in the cost Q-o-Q and Y-o-Y?

Shardul, do you want to please take that?

Yes. So freight cost has in fact in Q2 has come down by almost 5% of our top line. So which used to be 20% in the previous quarter, it come down to almost 15% now. So that is the number which we have.

So secondly, I want to ask you the CapEx, the INR 60 crores CapEx. If you can help us understand what -- which quarter will that start to commission? And on peak utilization, what is the kind of revenue potential it can have?

So the CapEx is primarily both Greenfield as well as internal expansions in existing plants. So while I can give you a time frame for the greenfield to be about say roughly 1.2 to 2 years. It is an ongoing process at our plant. So as far as revenue kick in is concerned at full capacity at 100% capacity, the greenfield should be around INR 170 crores to INR 180 crores as well as we would be giving probably quite a substantial figure from our internal expansion also.

Understood. And sir, what is this greenfield? Is it largely for frozen food category or some other expansion?

It's for Frozen foods, just to give you an idea, it's for frozen foods where we would add most of we would replicate all the lines which we have in Nadiad today.

And we'll be adding some new product lines as well in this. Yes. So yes, it's -- the first phase is frozen, then we have a second phase planned for some other ambient products as well.

Understood. And the Indian brand ADF Soul, where is that getting manufactured? Is it in the lease plant or...

No, that's being manufactured in our Nashik facility.

Understood. And...

Ambient products.

Got it. And the lease facility for what category and when is the lease contract?

So the lease facility is for frozen products. And -- it will probably -- we will continue with the lease facility till the greenfield project is complete so for another 2 years at least.

Sir, just to understand on the gross margin piece between the U.S. and our other European and Middle East markets and the brands that we cater to in those regions, how would Indian ADF Soul be, I'm just trying to understand on the gross margin piece, how would ADF Soul be for us. Is it higher than the other regions or?

So the ADF Soul also is -- because it's a premium brand, the gross margins are upwards, I mean between 40% to 50% margin -- gross margins.

Okay. And what is the kind of marketing ad spends we are looking at, let's say, in the next 5 months, we'll be getting 5 months in FY '23. So what is the kind of an absolute amount if there is in mind?

So for the next 5 months, we are looking at close to about INR 3 crores in marketing spend.

Okay. So will we be breaking even in those 5 months or breakeven is going to happen FY '24?

No, FY '24 will be breakeven. This financial year, no, it won't breakeven. But it's a new brand. We have to make the investments.

Fair enough. Fair enough. Lastly, sir, just an update on the QSR acquisition we did last quarter or an investment we did last quarter, what is the update there?

We put that investment on hold for the moment. So we haven't made the investment yet. We put it on hold. We will be deciding on it in the next -- before the end of this fiscal year.

And is it committed? Or is there some other reason for not keeping it on hold?

No, there are certain discussions we are having with that company. So till certain clarity is not there, we've decided to put it on hold. We are -- the discussions are still going on. It's not ended -- I mean we are still going on with the discussions.

Right. So sorry, last one from my end. The INR 60 crores CapEx greenfield and brownfield INR 70 crores will be funded through internal cash or?

Yes, yes, it will be funded through internal accruals. We will be taking some term loan, but primarily through internal accruals. And we are getting -- we are hopeful of getting some government subsidy also on this.

The next question from the line of from Faisal Hawa from H. G. Hawa and Company.

Sir, did I hear correctly that we are planning a Greenfield expansion of INR 180 crores totally?

No sir, it is INR 60 crores.

So I mean with the strategy of so many B2B -- sorry, B2C brands and who have really scaled up so well and taking the social media approach and telling a very compelling story. So will our new marketing firm from which we are going to also get PLI benefits abroad, will it be now more targeted towards this kind of platforms and so that we can scale up much faster? That is one. And second is, sir, how many more countries do you think we can really expand to? And third is that how many more companies are now engaging to act as a distributor for Indian diaspora products abroad?

So as far as this PLI scheme and -- so what we are going to do on the -- of course, even for our international brands, we do use social media, but not to the extent that we intend to use in India because India, they are going to -- our focus is to be online and sell these products line only for the first 1, 1.5 years. So internationally, even though we use the social media, majority of our money was spent on above the line like television, in-store promotions, POS material in the stores, demos, that is how we spend internationally. India is primarily going to be social media. Can you please remind me of your second question again?

Second question, sir, how many more countries can we really expand to where there's a very big Indian diaspora. I always believe that somebody who is able to succeed this model in the US, can then do it anywhere and that is what ADF has actually done?

See, we are currently in over 55 countries. We are adding constantly every year a couple of new countries get added on. We have added some countries in Europe as well. So, that is a constant process, but the more important thing is within the main markets that we are in we are increasing our depth in that market. That is the important thing and within those markets also we are now trying to target the non-Indian consumer. So, that is where we are going to start seeing more growth coming. The new countries will, of course, help and add, but they will be smaller countries because all the major ones we've already -- we are already present in. The important thing is in these major markets is to increase our penetration, which is what we are doing and addressing a new consumer base.

The third question is how many more companies that we could engage with us for Soul distributor...

So at the moment, we have the 2 anchor ones are Unilever and Patanjali for Europe. We have 2 more discussions going on, and we hope to conclude that within the next -- we've got one other company from Malaysia where we've started distribution and there is one more company, which we are in discussions with for further distribution.

And going forward, do you feel that these terms could get more and more favorable for us with the kind of mass we are building out and the distribution and the warehousing strengths that we have because with HUL and Patanjali, you may not have been able to negotiate that will -- being this is our first foray, but now it could be much more favorable to us.

Yes, absolutely. And it will only help us. I mean, as we add more products through our pipeline, it's only helping us reduce our distribution costs. The fixed costs get reduced further. So yes, it will be more beneficial for us going forward.

The next question is from the line of [ Raj Oza ] as an individual investor.

First of all apologies, if this question was repeated, I missed your commentary. Okay. I just wanted to understand on the raw material, like we also participated in many other calls, where management indicated that the raw material prices started stabilizing, but still see some kind of inflationary pressure in coming quarters. So I just wanted to understand your view on that on our raw material.

So as we've mentioned, we are still seeing some strong headwinds on the price increase on the raw materials. We are still seeing that and we hope in the next quarter, it gets better. But what is helping us is the freight costs are coming down, and we are trying to maintain our margins by better efficiencies and better product mix. Raw material price -- inflationary pressure continues to remain on the raw material prices.

Sure, sure. Sir, my last question was like we have seen good growth in our stand-alone business. But how do we assess the performance of our products on a local level like which big-box retailer we are targeting to enter? And what on what criteria, what basis we enter them and how do we assess...

So all our country managers' performance is evaluated on the budget and targets that we've given to them, right? And as far as India goes, we have just started last month with the launch of ADF Soul, which is going to be online only. And the initial response on that has been very good. So we hope to see good traction in the next financial year on this brand as we have a lot of exciting new products, which we intend to launch in the Indian market.

The next question is from the line of Ashish Kacholia from Lucky Investment Managers. Please go ahead.

My question basically is that we are currently running at a run rate of about INR 200 crores per quarter. By when do you feel that we can kind of reach a run rate of INR 400 crores per quarter in how many years or how are you seeing that opportunity space opening up for us?

Ashish, so as we've always maintained that our endeavor is to try and double up in size every 3 years. Because of COVID and certain disruptions, this financial year was a little bit of a challenge. But otherwise, had we not gone through those disruptions, I think we would be on track to do that. Now that the worst is behind us, I think we hope to continue with that trajectory of doubling up every 3 years.

Okay. So you are seeing because the U.S. and these are mature markets, so that would lead to this doubling of our sales out there?

So our own -- if you saw the stand-alone business of our ethnic food -- Indian food brand, that gives us all the confidence that we should be able to do it. We are seeing strong demand for those products, and we are pushing that. We've seen a good growth on that even in this fiscal year. So we feel confident on that basis from this product line.

So largely the Indian diaspora or this is -- we are able to reach out to the local communities there as well?

Well, at the moment, it is the Indian diaspora. And of course, we have already started making inroads in distribution for the mainstream consumer as well. So -- but currently, largely through the Indian diaspora that we are seeing a strong demand. And as I mentioned, the mainstream is something where we see a good runway going forward for us.

But the Indian diaspora will -- I mean, the diaspora itself may not be growing at a great pace, right? So I mean we are taking market share from somebody else? Or what are the main demand drivers for our growth?

So it's a combination of a couple of things, Ashish. We are taking market share. We are increasing our penetration in terms of our width and depth in the stores, and we are adding new products which are helping the growth as well.

[Operator Instructions] We have a follow-up question that has come up from the line of Anupam Agarwal from Lucky Investments. Please go ahead.

If you can help us understand the 17% growth on H1 over H1, can you bifurcate that between the price hikes we have been taking on the volume growth?

Shardul, can you please answer that?

Yes. So it's roughly around 60% is coming from the price and 30% to 40% is coming from the volume.

Okay. And how easy is it for us to take such a price hike every year? Or is it -- I mean, just a onetime every 2, 3 years?

Yes. I mean we can't take such price increases every year unless we are under like these kind of extraordinary circumstances where everyone was getting hit by high cost on the raw materials, on the freight, all of that. But normally, we do have price increases of about 4% to 5%. It all depends. So this year was an extraordinary year and everyone, not just us, but a lot of other competitors also did take a price increase. Everyone's percentage would have been different but this is not a normal trend. It all depends on all the other situations. If there's a crop failure, of course, then one must take a price increase accordingly. But if it's just normal, then it's about under 5%.

Understood. Sir, you mentioned about HUL selling some brands to a PE firm and because of that disruption, we are in a transition phase and all that. What is the kind of revenue loss we have seen during this transition and the brands that were sold to a PE firm?

So brands like Lipton, all their tea brands have been sold to HUL India. And I think Unilever Indonesia, if I'm not mistaken, there are 2 of the Unilever companies which have kept those brands. The rights across the world everywhere else has been sold to this other brands. So all your brands like Red Label Tea, Taj Mahal Tea, Lipton Yellow Label, all these brands have been worldwide rights have been sold to this private equity firm. And what happened during this whole transition period is we had -- I think in terms of sales loss, Shardul, how much was the sales loss? There wasn't any growth, and I know there was a marginal sales loss because of that.

Roughly 7% to 8%...

7% to 8% of the HUL billing that we used to do?

Yes, correct. We never worked with HUL. We were always working with Unilever Canada and Unilever International. So our dealings have never done with HUL.

Right. Sir, absolute amount, if you can highlight?

So in Q2, we did around -- when we convert in rupees, it's around INR 16 crores versus INR 18 crores in the last year same period.

Sir, lastly on the distribution business after Patanjali so for us to grow to a higher level, let's say, INR 150 crores to INR 200 crores, are we in dialogues with other brand agencies as well for us to distribute their products?

Yes. We are having some ongoing discussions with 2 more companies.

Got it. And any time lines we can...

So with one company, I think before the end of this year or probably last quarter, by then we should finalize it. We are hopeful to finalize with this one company before the end of this year.

Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Bimal Thakkar for closing comments. Thank you, and over to you, sir.

Thank you, everyone, for the participation and wish you a good evening, and we'll catch up in the next quarter.

Thank you very much. Ladies and gentlemen, on behalf of ADF Foods Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.