Agthia Group PJSC (AGTHIA) Earnings Call Transcript & Summary

Hello, everyone. This is Hatem Alaa from EFG Hermes, and welcome to Agthia's Full Year 2020 Results Conference Call. [Operator Instructions]

This meeting is being recorded.

I'll now hand over the call to Sahar Srour, the company's Investor Relations management. Please go ahead.

Thank you so much, Hatem. Hi, everyone. I hope all of you are doing well. Thank you for joining us today on Agthia Group's Earnings Conference Call for the full year ending 2020 hosted by Alan Smith, our group CEO; and Ammar Al Ghoul, our group CFO. As usual, Alan will first talk about the performance highlights during the period, after which, Ammar will cover the financial results. We will then continue with the Q&A session. For your reference, the relevant presentation is available in the Investors section of the company's website. Please note also that this call might contain forward-looking statements, which should be considered in conjunction with the disclaimer included in the presentation. Over to you, Alan.

Thanks, Sahar, and good afternoon, everybody. So fiscal year 2020, I think, was an exceptional year upon which the company experienced transformational changes across various business aspects. H1, we came across unprecedented business environment imposed by the COVID-19 pandemic. I think we showcased our agility and resilience in response to that. This was evidenced by us with response to ensure productivity whilst of course preserving the safety of our employees. Q3 saw us conduct a strategic review of our business, including our books, which resulted in significant onetime negative impact on our bottom line with the ultimate aim of improving the quality of earnings and position in the group for long-term sustainable growth. In Q4, the focus of the new leadership team on delivering on our growth strategy was translated into several successful milestones. We acquired the Al Foah Company, the world's largest date processing and packaging company. And that really gives us the opportunity to diversify our product offerings, enhance our competitive access to new markets and allow for cost of revenue synergies from the integration of the combined platform here in the UAE. We also announced the acquisition of Al Faysal Bakery & Sweets, one of the biggest bakery players in Kuwait, which, obviously, allows us to upscale our overall operations in the Kuwaiti market to take advantage of distribution synergies and optimize our costs through back-end integration. We also officially signed a UAE distribution partnership agreement with VOSS of Norway AS. As a premium lifestyle brand, VOSS marks our long-term commitment to lead the water category, and this gives us an opportunity to move into the -- or operate in the premium water segment. In Q1 2021, we also announced our plans to acquire a majority stake in Nabil Foods, one of the leading regional producers of frozen and chilled processed protein products. This transaction, subject to shareholder and regulatory approval, will give us the -- we place Agthia at the forefront of a fast-growing industry, and it will immediately enable us to access new revenue streams, expanding into different product offerings and obviously give us cost and revenue synergies across the network. So if we jump on to the financial side, I think group revenue stood at AED 2.06 billion. I think AED 1.1% increase versus prior year despite the headwinds. Our top line growth is largely driven by our flour, our food and 5-gallon water segments, which we'll build on a little bit in following slides. Group net profits came in at AED 34.5 million, obviously, which was impacted by the unfavorable sales mix, plus also the fairly significant onetime impairments and other adjustments we deliberately booked in the third quarter. If we exclude the aggregate AED 82 million of one-offs, our normalized net profit would have been AED 117 million. Resilient operations continue to underpin our robust liquidity position as we continue to focus on our working capital overhaul for a strong cash flow generation. In terms of CapEx as the bulk group pertains to maintenance CapEx, overall spending was lower versus previous year. We had available capacity, and as we made prudent decisions on where to invest and what to spend on. If we move on to the next slide, please. So when it comes to market shares, we continue to retain our leadership in water, in flour and in animal feed and tomato paste across the Al Ain, Grand Mills and Agrivita brands. So in UAE, our bottled water share for the total business was 29.4%, flour at 30% and feed, 41%. On the next slide, we'll take you through the sales performance. So as for our overall sales performance, we'll provide some insight by product category, geography and sales channel. In terms of category, we saw that our HOD or Home and Office Distribution business grew with higher volumes from homes, offsetting the negative impact on office delivery, but we saw good growth in that channel. Food categories had a very strong year, sustained at consumption. Consumers getting back in touch with their kitchens and certain e-commerce orders helped us there. Agri improved on both domestic and export demand. And that was -- we'll come back to it a little bit later, but that was helped by the order for World Food Program in quarter 1 and also strong performance in the retail channel. Now that more than offset the lower volumes from the bottled water category in UAE and KSA and the Beverage segment, reflecting the impact of -- caused by the slower-than-expected performance in the food service channel. And obviously, on the beverage side, on the juice side, it was impacted by excise tax. From a geographic perspective, we faced contrasted results in the UAE, where increased demand for most of our products portfolio in response to COVID-19 did not offset the shortfall in bottled water, which really came from the food service channel, the closure of restaurants, plus also the restrained tourism. In KSA, demand was compromised by the absence of the religious tourism, coupled with us taking a more cautious line on our credit sales after the challenges we saw with the bad debt stemming from sales in 2019. Egypt and Kuwait operations reported good growth on respective increase for essential foods, and I think our water business in Kuwait grew around 50%. By channel, all markets witnessed a significant shift from out-of-home consumption to at-home consumption. So higher sales in retail particularly in modern trade versus traditional trade, e-commerce and municipality channels. However, food service and convenience stores were the most impacted from lockdowns and the restricted tourism, specifically in the first half of the year. Just quickly focusing on water and beverage, if we can shift the slide, please, Sahar. So if we look across our 3 segmental divisions, we start with water and beverage. So came in at just under AED 800 million, AED 799 million. In the UAE, 5-gallon recorded good growth, particularly from homes, which overcompensated headwinds in the corporates channel. On the bottled water sales, on the other hand, we had a decline in volume, which was almost totally driven by the loss in the food service channel. We started to see food service improve in the second half of the year. But obviously, it was lower than we expected as the COVID situation continued to sustain. Kuwaiti operations registered 31.5% year-on-year growth as we continue to build our business and market share. KSA was largely hit by movement restrictions, particularly in H1. Nevertheless, as part of our continued efforts to place KSA operations back on track, we have now established promising distribution contracts with key clients, and we saw a change in the overall organization with our recruitment of Head of International, Head of Finance and Head of Sales in the market. So that gives us a good platform when we start to see our business turn around at quarter 4 and get back to growth. As for beverages, the implementation of excise tax had a --, along with the closure of Eateries had a negative impact on overall sales. We also agreed proactively with our friends at Capri-Sun to mutually agree the end of that licensing agreement, which kicked in at the end of December 2020. And they've taken over the business back from January 2021, and we had quite a smooth exit in that regard. If we look on water market shares, so Agthia overall has been able to sustain the #1 position on volume basis on a full year basis, obviously driven by the Al Ain brand. If we look on the table on the right, you can see that we were able to expand that share by about 49 basis points, which is a testament to the overall performance of the business in spite of the category declining by around 10.9% in 2020 versus the previous year. Bear in mind, the category data of the retail data for Nielsen covers modern trade and traditional trade. It doesn't cover all of the other channels that we operate in. If we move on to the Food segment, fairly exceptional year across our different segments. So this falls under the consumer business. We had sales of around AED 327 million, increasing by 32% versus the previous year. We saw remarkable growth driven by both the change in consumer habits and the at-home consumption in the e-commerce business, but also we grew share in many of the businesses. The food segment continues to shape its portfolio. And it's a growing contributor to the P&L, and we continue to look to expand our margins because, obviously, we need to make sure the overall mix in the business moves in the right direction. Trading items, which contribute half of the revenues, recorded 26% year-on-year growth as we capitalized on the response to the COVID situation. We immediately opened 2 new additional municipality channels. We added new SKUs. And we also were very proactive in activating home delivery orders. We put 100 additional trucks on the road in Q2. And we also set up a drive-thru facility for consumers to be able to collect the goods in a safe environment. In tomato paste and frozen vegetables, revenue from UAE and Egypt grew by 41% versus prior year as we continue to build our catering business. But also, we've had a very good response in terms of market share. We've driven distribution. And obviously, we benefited from the overall category growth as consumers bought more. Bakery business tripled as we stepped in to support increased demand for essential foods. So all in all, on the food side, a good year. On dairy, we actually managed -- our dairy business has been historically challenged. We managed to reduce our losses despite top line pressure, but we improved our mix significantly, so the margins improved, and the net impact was a reduced loss on the bottom line. And we continue to look at how we can improve that moving forward. So in terms of overall property, the food segment margins continue to enhance on the volumes and also our improvements in supply chain. Moving on to the Agri business. I think a good year for the Agri business overall, particularly from a flour point -- perspective. Flour segment posted strong growth of 11% versus prior year, driven by higher domestic demand, particularly in the retail space and also export sales, specifically helped by a World Food Program order in the first quarter of 2020. On the other hand, animal feed continues to be flat versus the previous year. And overall, the team did well despite a drop in local demand amid further controls to restrict commercial farms from a subsidy perspective. That's really it from my side. I'll now pass over to Ammar to take you through a bit more of the details from a financial perspective. Over to you, Ammar.

Thank you, Alan, so much. Good afternoon, ladies and gentlemen. So as mentioned by Alan, the group revenue grew by 1.1% year-on-year, reaching AED 2.06 billion in 2020. The net revenue contribution by consumer business reached approximately 55%, whereas the Agri business contributed the remaining 45%. The consumer business revenue came in at AED 1.13 billion out of which, the Water & Beverages segment posted sales of approximately AED 799 million. And the Food segment, the remaining AED 327 million. There are in each of the Food segment, Kuwait operations and the 5-gallon Water business was largely offset by the slip in bottled water sales in UAE, Saudi Arabia and the beverages. The Agri business, on the other hand, revenue recorded AED 935 million and grew by 5% year-on-year on higher flour sales as elaborated by Alan. Moving, Sahar, please to the next slide, where we show the group segmented gross profit margin. Current quarter gross margin came at 32.7% versus 33% in Q4 2019. This translates into a full year gross margin of 31.1% versus 32.2% last year, same quarter. We managed to enhance our gross margin over the course of 2020, closing at 32.7% in Q4 versus 29.9% in Q1. We highlighted that collaborative team efforts led to water margin improvement by 79 basis points despite the lower sales, specifically to the food service channel, which was down by 34% versus last year. This is equivalent to AED 48 million of lost sales in this particular channel. All in all, we managed to enhance gross margin for the full year 2020 versus the same period last year across all categories, except for the beverage and excise tax implementation. Each of the key categories, which aggregately constitute more than 95% of the total revenue recorded a better gross margin. Nevertheless, the group margin went down, first, on the account of sales mix tilted towards lower-margin Food segment, being 29% of the total consumer sales for the current year versus 22% back in 2019. And finally, a lower beverage volume. Next, we talk about the net profit. So the group net profit prevailed at AED 34.5 million for the year 2020. Operationally, profitability was impacted by the Consumer business unfavorable sales mix and the group level of extra manufacturing and logistic costs borne to guarantee business continuity, specifically in the first half of the year. Strategically, the management decided to adopt a prudent policy to encourage cost-saving initiatives across our value chain and take the lead on recording all foreseeable impairment deemed necessary to improve the long-term quality of earnings, as elaborated earlier by Alan. Excluding the AED 82 million off recorded throughout the year and until the end of Q3, net profit shortfall will be radically reduced. This will be further explained in the next slide. AED 39 million related to the World Food Program order have slightly countered the lost revenue against lower volume of beverage on excise tax and of bottled water in UAE and KSA onerous -- impacted demand from the struggling food service segment and tourism amidst COVID-19. Nevertheless, robust growth momentum across our Flour, Food segments, Kuwait operations and the 5-Gallon water business resulted in an additional organic growth, taking our net revenue to AED 2.06 billion. Bridging the net profit for the year 2019, all the way to the reported net profit of 2020, the main building blocks, I'll talk about them now. In addition to the resulting impact of the above items, on the bottom line, we highlighted 3 key variances. We first recorded AED 22 million of additional profit from the enhanced operations along with the cost optimization across our value chain, which slightly countered the one-off adjustments, which are shown on the next slide. And here, we are basically bridging the reported net profit of AED 34.5 million to the what we believe hurdle normalized net profit amounted to AED 117 million. As explained in the Q3 results call, Agthia has taken a strategic decision to improve the long-term quality of earnings and to strengthen the balance sheet. As a result, a total impairment booked in the 9 months of the fiscal year 2020 amounted to AED 82.5 million. This includes first and most significant, AED 58 million of bad debt provisions plus AED 7.2 million of net inventory provisions, both following a thorough review of our receivables and inventory outstanding balances. Second, a AED 9.5 million impairment Capri Sun assets and inventories after signing a mutual agreement to end the licensing arrangements with our partners at Capri Sun in a very good terms. And finally, AED 7.7 million a onetime accounting adjustment upon changing the payment and the collection process from customers, sales and our community support division. So on a like-for-like basis, net of such one-off adjustments, our normalized net profit will prevail at AED 117 million. With this, we conclude today, thank you so much to the floor is yours for Q&A.

[Operator Instructions] We have our first question from the line of Nishit Lakhotia.

I have a couple of questions. First, on the Agri business of Agthia. And on the class side, given the rise in wheat prices, how are you seeing that affecting your business currently? And if you can give any idea on the competition as well that you're seeing. Earlier, there is a lot of competition from the Ukraine flour. So how is the market now? Any idea on that would be helpful. And on the feed side, if you can elaborate more on the controls on the subsidized channels that is affecting the feed, what exactly are these? And how do you see this going forward in 2021? So that's on the Agri side of the business? My second question is on the Nabil acquisition. When are you targeting to finish this acquisition, on the time lines? Any guidance would be helpful. And third, the dividends. It seems that Agthia's given close to 100% dividends in terms of their adjusted profits of AED 117 million. So going forward, would the payout policy would be something as generous as 2020? Any color on that would be helpful.

So Ammar, I suggest if you want to take the last two questions, the Nabil question and the dividend question, and then I'll look back on the questions on the Agri business.

Certainly, Alan, you gave me the easy questions. Thank you. On Nabil, we're running at full speed, Nishit, to finalize the legal formalities associated with closing the deal. We reached an advanced stage. Soon, we will announce the EGM date in which the transaction will be presented to the shareholders for final approval. So a reasonable expected closing month would be early May 2021. When it comes to the dividends, this is a very good question. As a matter of fact, for the last 4 years, we have been distributing 15% of our share capital as dividends, equivalent of AED 0.15 per share. So from a cash flow perspective, available cash as well as borrowing capacity for future expansion on an non-organic basis, we did a number of mathematical calculations. And then the management concluded and presented to the Board that we do have the capacity to distribute to the same levels we have been distributing, at least in the past 4 years. And then a decision was taken to improve the dividends payout ratio from a dividend per share perspective by 10%. So you must have noticed, we increased it from 15% per share to 16.5% per share. This is a clear demonstration of Agthia's strong balance sheet, strong management of cash flow, and the clear policy to reward the investors and share with them Agthia profits as we generate them rather than waiting 1 full year to announce them and pay them. Does that answer the questions you had?

Yes.

So thanks, Ammar. On the two other questions. So I'll take the flour question first. Yes we've seen a recent increase in wheat prices globally. And the way we've focused on that is obviously by looking at our pricing in the market and continuing as we did during 2020 to focus on cost. So our intent is obviously to make sure moving forward that we are able to sustain our profitability from that perspective. So a combination of pricing and productivity to optimize or maintain our margins and bottom line on the flour business. In terms of competition at the moment in terms of anything else coming into the market, I think most of the competition that we see in the UAE is between the local suppliers. So at this point in time, no major issue from that side. But of course, obviously, the price increases are relatively recent, so we're going to have to see how that plays out over the course of 2021. On the feed side, the government tightened the policy with the commercial farms in terms of then having to make sure that they looked at the cycles that they ran for each of the growing cycles for the animals and adjusted the way that they were paying out, more on a usage basis rather than a fixed volume basis. The impact of that was the farms have become more efficient and consequently bought less feed at subsidized prices. Our open market pricing -- on our open market business on feed has continued to do well. The Agrivita brand is extremely well recognized in the market. The nutritional profiles of our products are scientifically tested. And the fact that we have #1 share, I think is testament to the quality of our R&D and operations team here in Agthia. So feed is still a core part of our business, and it's had a good year considering the headwinds. And it just demonstrates, as we did with flour over recent years, as the subsidies get phased out, we're able to continue to maintain the performance of those categories.

[Operator Instructions] We have a question from the line of [indiscernible].

Just a couple of questions from my side. I just wanted to understand when is the consolidation of the incoming assets expected? And also what's their performance been like during the COVID environment in 2020 on a like-for-like basis and also how they are trending as we speak.

So I'll take part of this question, Alan, if you don't mind, I'll start. So we started already the statutory consolidation of Al Foah because the deal was closed very much at the very beginning of January 2021, so we'll capture their P&L items line by line from that very date. As far as Al Faysal Bakery in Kuwait, statutory consolidation of the P&L will start from February 1, more precisely from January 26, 2021. And for Nabil, as we expect to finalize legal formalities early May, so most probably from May 1, 2021. Just to bring to your attention -- to the other audience attention that for Al Faysal and Al Foah, there will be no dividend distribution. So whatever, returned earnings is available on the balance sheet credit side will ultimately end up consolidated with Agthia. So even for Al Faysal the amount of P&L statutory consolidation that will not come into Agthia will ultimately end up in the equity of Agthia, but will not be routed through the P&L, though. As far as the performance is concerned, as every food and beverage business, they went through some difficult times, particularly when it comes to sales to catering services. But what we have seen from resilience and ability to compensate the sales into different channels, make us confident that there will be no impact on the valuations because we have seen the COVID-19 impact, while we were still studying and going through the valuations and the due diligence. So we at least for what we have seen so far, there was no significant impact on the earnings.

Okay. Fair enough. And would you be able to comment on how the leverage profile or net debt to EBITDA of Agthia could change after you digested all the mergers?