Agthia Group PJSC (AGTHIA) Earnings Call Transcript & Summary

Hello, everyone. This is Hatem Alaa from EFG Hermes, and welcome to Agthia's First Quarter 2021 Results Conference Call. [indiscernible] Now I'll hand over the call to [ management's presentation ] and we'll [indiscernible] [Operator Instructions] Please go ahead, Sahar.

Thank you, Hatem, and thank you, everyone, for joining us today in our earnings conference call for Q1 2021. As usual, Alan will first start by talking about the performance highlights during the period. After which, Ammar will cover the financial results. And then we'll follow with a Q&A session. For your reference, the presentation is available in the Investors section on the company's website. Please also note 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.

Good afternoon, everybody. Thank you [indiscernible] obviously, driving the transformational journey across the business. On the M&A front, we consolidated 2 companies in Q1 with Al Foah dates business from Jan 1 and Al Faysal Bakery from the end of January. We also announced 2 new acquisitions [ during the forefront ] of the fast-growing processed protein industry. Both Nabil in Jordan and Ismailia or Atyab in Egypt are leading processed protein producers in their respective markets. Given our proactive M&A strategy, we've also established transformation office led by Fabio Cattaneo. And that's really to ensure that we're driving change in the base business while also ensuring a smooth integration with the new businesses in -- during Q1, which we've made significant strides in that regard. Fabio himself brings 20 years of relevant experience from General Electric and private equity. We are confident that this addition, together with the broader experience, and as a leadership team, will help us deliver on the recently announced 2025 strategy, of course, as underscored by our 3 pillars of growth, efficiency and capability. On sustainability initiatives, we published our first stand-alone sustainability report for 2020. You can see that on our website, and that really showcases our commitment to monitoring and reporting our environment, social and governance performance. Further emphasizing on our commitment to a more circular economy, we utilized our partnership with Veolia globally. And clearly, [indiscernible] to launch the Recapp project, which happened in November 2020. And it's pleasing to see a number of other companies have now started to come onboard with that project. In just 3 months, that application garnered more than 1,000 users and helped us flatten more than 2 tons of recyclables in Abu Dhabi. Additionally, demonstrating our ambition to bring in pioneering products, Al Ain plant-based bottle won the Most Impactful Sustainable Product Award at Gulfood Innovation Awards this year. On 8th of April 2021, we held our Annual General Meeting, where the shareholders approved a AED 0.165 dividend per share for the year 2020, implying 10% year-on-year increase. The Board also recommended a semiannual dividend policy for the year 2021 onwards. This policy [indiscernible] to provide attractive and [indiscernible] profit share [indiscernible]. [indiscernible] highlights. So over the pretty short quarter [indiscernible] 16.6% [indiscernible] AED 666 million in the first quarter [indiscernible] our net profit achieved [indiscernible] year-on-year growth. Earnings per share increased 57% versus last year was obviously supported by those integrations, both adding more than [ AED 8 ] million to the bottom line. And they offset some of the challenges we saw just in terms of input costs, particularly on higher grain costs. And we also have had some incremental costs, obviously, related to our investments and M&A strategy. Resilient operations continue to underpin our robust liquidity position as we continue to focus on working capital. You can see that in the operating cash flow performance. And in terms of CapEx, we've obviously been cautious during the first quarter with 1.9% of revenue spend, and it's consistent with our commitment to focus on maintenance CapEx. If we must be at the group sales performance. In terms of how the different [indiscernible] have performed, we get to see strength in our [indiscernible] business to be obviously in [indiscernible] by increased profit shares from our acquisition [indiscernible] takeaway through this year, expanding our trends. And we've made some progress in our turnaround of our Saudi operations. And these results were achieved in spite of both of those markets having prolonged movement restrictions. Food categories continue to do well, obviously, off the back of continued at-home consumption and e-commerce. And of course, we've had Al Foah removed and Al Faysal within the food category. So this has more than offset the lower volumes from bottled water versus the same period last year. But let's not forget, we'd already highlighted that the Q1 2020 was a pre-COVID quarter, and that was obviously a strong quarter in terms of overall performance. And you know that we -- and we saw that start to deteriorate on just the year went particularly because of the food service [ channel ]. Lower flour and [indiscernible] sales in the UAE with absence of [indiscernible] in Q1 and, of course, the exit of our [indiscernible] the mutual expire -- mutual nation funds agreement with our partners. We were in a strong Q1. All channels lapped in pre-COVID are only -- are active risk to retail just to [indiscernible] it depends on e-commerce and also from deliveries as evident by our continued progress in sales. If we do a category [ story ]. So if I could also bridge [indiscernible] AED 102 million, obviously, that [indiscernible] drivers behind that. Obviously, we saw [indiscernible] Q1 in UAE. We saw growth in KSA, Kuwait and Turkey, as we mentioned. And our beverage business was down around AED 10 million, predominantly driven by the exit of the [indiscernible]. We move on to the next one. We take a bit of a closer look at our market. This is the volume share trend on the M&A level for the last 12 months ending February 2021. So continued [indiscernible] leading with respect [indiscernible] shares 9% and 20%. Al Ain contributed the number [ of ranking ] in the UAE despite [indiscernible] to decline. And that we've been a strong one last Q1. The air market [indiscernible] for 12 [indiscernible] actually, Q1 declined much to 14. If we go to food. So on the food, this falls on consumer business. AED 238 million was consolidated on Al Faysal [indiscernible] category, which goes to show that this portfolio has a positive and growth [indiscernible] in line with our 2020 strategy. The additional Al Faysal business contributed AED 137 million to our top line during the 3-month period. Dates is a seasonal business. So typically, Q2 and Q3 are softer. Q4 and Q1 are [ drop periods ] where most of the sales happens. So we did pretty well, pretty happy with the numbers in Q1 in terms of the business plan before we acquired the business. That's in spite of some headwinds from excess supply of dates in KSA, driven by the subdued religious season last year. Trading items sales were flat versus Q1 2020 despite strong consumer demand as COVID kicked in. Tomato paste, frozen vegetables revenue in UAE grew 10% as we expand to the catering channel and also increased our market share within UAE. Our bakery business is now at 7% of the food category as we included our Al Faysal Bakery in Kuwait post0-consolidation on January 27. And we managed to implore [indiscernible]. Revenues for [indiscernible] In terms of activity, the [indiscernible] the back elevated volumes. [indiscernible] our new business offering. If we move on to agri. As you mentioned, so the flour [indiscernible] because the [indiscernible]. Despite that, we had increased performance in [indiscernible]. And most of the revenues were relatively flat. So we are set up in demand, but we also past the -- we're able to offset that through some particular increases in the open market. So that's it from my side. I'll pass it to Ammar to [indiscernible] with the financials. And I will see you again in the Q&A.

Okay. Thank you. Good afternoon, ladies and gentlemen. So I'll start today with the [indiscernible] starting the year better. So group revenue grew by 17% year-on-year, reaching AED 666 million approximately, including Al Foah and Al Faysal Bakery. With the addition of Al Foah and Al Faysal Bakery under the consumer business division, which we so call CBD, the net revenue contribution by CBD jumped to 65%, leaving the agri business behind, generating the remaining 35% of the group's revenue. The consumer business revenue reached by the end of Q1 AED 431 million approximate, out of which the water and beverage segment posted sales of AED 192 million and the full segment remaining AED 239 million. [indiscernible] in the food segment post the inclusion of Al Foah and Al Faysal Bakery, largely offset the slip in bottled water and beverage sales annually. As far as the agri is concerned, revenue reached AED 235 million [indiscernible], which was mainly driven by onetime water food program order as elaborated by Alan. So [indiscernible] gives it on the profit margin. First quarter gross profit came at 30.7% versus 29.9% in Q1 '20. Obviously, the unfavorable sales mix with the higher contribution from the food segment, 5%% of the consumer versus 27% in Q1 back in 2020. We meant to enhance our gross margin versus last year on operational efficiencies, highlighted the continuous team efforts and improving the water and beverage category margins. So we reached to 106 basis points despite lower sales versus pre-COVID in Q1 2020, which was, as a matter of fact, a one-off quarter from one hand pre-COVID; from the other hand was a panic buying at the consumer level and at the retail level. The food [indiscernible] significant uplift in margin, all the way up to 10.3% year-on-year post the consolidation of the margin-accretive Al Foah and Al Faysal businesses. The agri business gross margin, on the other hand, remained flat despite the significant increase in the commodity pricing. On the other hand, the quarter-on-quarter gross margin was down from 32.7% in Q4 2020 on higher grain, most impacting our Q1 2021 margin. Moving to net profit [ now ]. The group net profit prevailed at approximately 50 -- precisely AED 40.6 million for the period, growing 80% year-on-year growth, supported by the including of Al Foah and Al Faysal. On [indiscernible] basis, the existing acquisition and [indiscernible] transformation and advisory costs in 2021 as well as the World Food Program-related profits and bad debts provision recorded in 2020. Profitability will come in line versus last year despite the higher grain costs. On the following slide, we look at [ the work for ] reconciling between last year and this year. So [indiscernible] AED 39 million related last year World Food Program [indiscernible] upside bottled [indiscernible] were marginally countered by robust growth momentum across our international operations, food segment and the 5-gallon water business. Nevertheless, the consolidation of Al Foah and Al Faysal in Q1 resulted in an inorganic growth, taking our net revenue to AED 666 million. Then moving to profits, higher cost toward [indiscernible] high agri business [indiscernible] across our value chain. This is relatively [indiscernible] on a stand-alone basis. After accounting for Al Foah and Faysal [indiscernible] consolidation started from January 1, 2021, while Al Faysal technically started from late January, beginning of February, along with the associated costs and the accelerated net profit prevailed at AED 50 million. Thank you so much. We are through with today's prepared remarks. [indiscernible] the floor is yours.

[Operator instructions] [indiscernible]

My question is -- is primarily on the acquisitions contribution this quarter. If I look at the bottom line of AED 28 million, that looks quite strong compared to what was actually shared in the recent [indiscernible] presentation where it was mentioned that the pro forma net income had a lift by AED 52 million -- AED 42 million from Al Foah and AED 10 million from Al Faysal Bakery for the year. So AED 52 million contribution would have happened last year. And we have already seen AED 28 million coming in the first quarter. [ Even ] on the revenue side, it looks very strong. So is this -- are there any one-offs in this contribution, especially at the bottom level for Al Foah for 1Q? Or this is the run rate that we expect in the coming quarters? Or there is any seasonality aspects that you can highlight?

Yes. I can take this one, Alan. Thank you for the question. Actually, there was no one-offs at all. And this is not a run rate. It was basically the third [ option ] you gave; it's a seasonality. And from a revenue perspective and from profitability perspective, Al Foah being in the date industry, they have 2 seasons. Season 1 is in Q1 of the fiscal year, at least this year and most probably the year after as well, given what is Ramadan [ position ] in the Gregorian calendar year and Q4 as well. So you will see the increase in revenue and profitability in Q1. This will be normalized Q2 and Q3 and will hopefully be up again in fourth. So this is basically there is some more concentration of profitability came in from Al Foah alone. Well, Al Faysal profitability is evenly, to an extent, distributed across the year.

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

My question is related to acquisition of Nabil Foods and Ismailia. Can you give us a rough idea about when will they will be concluded and possible consolidation of them? And in your strategy, you also mentioned about further acquisition, and you also did extended your target geography. So any acquisitions that you are targeting [ or achieved in this ] situation?

I'll take the first part, Mr. [indiscernible]. Under consolidation, we technically started managing Nabil from the beginning of Q2. So hopefully, this consolidation will be effective April 1 onward. As far as Ismailia in Egypt is concerned, we're still waiting for some bigger formalities to be completed. I can't give a commitment, [ but I ] know and exactly the legal formalities will finish, but we're working hard to finish as soon [ as optimal ]. And we are hoping that towards the beginning of Q3, we'll be able to consolidate for [indiscernible] purposes. However, despite some delays in the consolidation of Ismailia awaiting finalization of legalities, there is no any dividend distribution agreement in place. So whatever results of operations from the day we signed the acquisition agreement will ultimately flow into the [ segment ] of shareholders' equity and will come into [indiscernible] shareholders. However, the same won't be routed through the P&L until we start this [indiscernible] consolidation.

Thanks, Ammar. And on the other question, I think the best way to answer that is to say, look, we've been pretty active over the last time [indiscernible] acquisitions. We've been moving at quite a fast pace. Obviously, we said in the strategy presentation, but it's not just about buying companies; it's about [indiscernible] them. And I think we look at our Q1 results, I think, we started pretty strongly with both of the 2 acquisitions that have been consolidated, and that's testament to the team and the way that the integration process is working. So we're pretty happy with that [indiscernible] still to come. So we're also working. We have communicated that we have a strategy to continue our pursuit of opportunities. But we've also said the pace of the next acquisition, once the right opportunity exists and meets our investment criteria. So much of our [indiscernible] M&A continues to work on developing that pipeline and having discussions to see if [ it is ] tangible that we can add to the business. So the process is ongoing, but nothing -- we'll talk to you as and when we have something concrete to talk about.

[Operator Instructions] And we have a question from [indiscernible]

A question regarding Al Foah and [ Ismailia ], if you can just give us the year-on-year performance of these 2 businesses. And basically, how did they perform compared to quarter 1 last year, both revenues and bottom line? That's the first question. And the second is regarding PET prices. The water business is still, I say, struggling in terms of UAE, especially with the lack of tourism. So with pressure on -- from demand, are you also seeing pressure on the PET prices? And we see -- even as demand recovers, we're not going to see margins [indiscernible] compared to [indiscernible] price?

Ammar, do you want to take the first part?

Yes, certainly, Alan. Thank you for the question. Starting with [indiscernible] Al Foah performance in Q1 2021 versus Q1 2020 is relatively good despite the fact that there is natural decrease in demand and natural increase in supply. The decrease in demand is driven by slowing on religious activities on gathering and social activities during Ramadan, the period before and after Ramadan. So we only saw at least during and before Ramadan. Yet due to efficiencies created by the management and as part as -- of the post-acquisition integration plan, we managed to relatively be close to 2020 performance. Al Faysal, on the other hand, they performed very well as compared to last year, slightly above Q1 2020, part of which is driven from the operations and part of -- from risk sharing some of the debt on the balance sheet of Faysal. So before the acquisition, they had a number of financing facilities at significantly higher rates, which we worked on immediately, changed the terms, reduced the cost. And that supported some of the operational downturns due to the restrictions enforced in Kuwait during Q1. So all in all, both companies performed relatively very well and I can confidently say at least up to our expectation.

Thanks, Ammar. I'll take the, I guess, 2-part question on water. Firstly, demand, as we said, if you look at the [ NAV ] numbers -- and this is measured channels. Obviously, we're selling in food service. We're selling in home, home and office delivery and also e-commerce and our municipality channels. But in terms of measured channels, you will see from earlier in the presentation that the category [ declined ] around 12% over the last 12 months. Now you have to take into account that, obviously, Q1 last year was the last quarter before COVID. And then March was also enhanced by some excessive buying, should we say, from both retail and consumer [ level ]. So Q1 last year was a bit of an unusual quarter in that regard. And as we look forward for the rest of the year, obviously, we're now going to be lapping Q2 [ due to ] relatively low quarter because of the fallout of COVID and the lockdowns. We are starting to see -- so from previous presentations [indiscernible] food service channel declined around 40% last year. We are seeing quarter-on-quarter improvements in our food service business, good performance [indiscernible]. Still nowhere near the 2020 performance, but we're certainly in the right direction. So we hope to see continued improvement there. [indiscernible] has become a lot tighter. And as you can imagine, the competitive space [ basically ] declining and competitors fighting for volume, pricing and retail channels has become more challenged. But home delivery, it continues to do well. E-commerce continues to do well, whether it's through retail or whether it's through the stand-alone retailers such as Amazon. So expect -- we're cautiously optimistic for the rest of the quarter. Obviously, we expect to see the economy approval on the like-for-like quarter. On the input cost on water, you mentioned PET. And obviously, with the oil price escalating over the last few months, it's [indiscernible] well, I have seen an increase in PET price. What we have in our team, we have a very strong procurement group who look at commodity prices, look at trends, look at historical patterns and make coverage decisions in terms of how far to cover up [ what ] price. So that's very much at the forefront of our thinking. I think PET did spike. Last month, it started to soften a little bit. But we're also working on productivity initiatives to try and make sure that whatever happens with the price and the ongoing impact on costs, we're able to try and offset that. So that's a little bit on how we see the cost services. The team is doing a lot of work background on the productivity initiatives, as I said. And yes, we see the water business in the UAE for the rest of the year.

Just a few follow-up questions, if you don't mind. So in terms of PET, how much do you hold inventory usually? And then, going back to all the acquisitions that you've made and the previous presentation, and not this presentation, the one regarding all the acquisitions, you gave an idea of the contribution of each business line and [indiscernible] each business line. Does that take into account a normalized working environment, no COVID impact?

So let me answer the second question first. So as we talk about our ambition, our ambition is to move up [indiscernible] normalized environment to -- for our consumer business [ and ] the consumer business to be at least 75% of total revenue. So that's our objective. And we -- in the previous presentation, we said, if we were to do a pro forma exercise on our business over the previous 12 months, then we'd already be kind of in the 72% range. But we also wanted to -- we want to continue to grow. So it's fair to say that we'd expect that -- we want to invest in consumer branded goods, so we'd expect that percentage to be well above 75% moving forward. In terms of our coverage position [ this year ], I say we have a commodities procurement group that is very specialized in this space. We have a committee on a monthly basis that reviews our coverage position and makes recommendations on whether to go shorter or to go longer in terms of what we're seeing in the market, the demand supply situation and what we should do. On the grains, it's a little bit more difficult because, obviously, the volumes that we're buying are significant. So we have to be conscious with the actual storage quantities that we're able to do. We don't buy futures per se. We just buy physical stocks, something that we're kind of constantly revisiting to see if we can get more efficient in that space. On PET, we make tactical purchases. I'll be very open. We make tactical purchases depending on price. And our coverage target move really depending on what the procurement team recommend. So in the middle of last year, PET pricing was very competitive versus long-term trends. So we took a longer coverage position. I'm not going to say exactly how far we took, but we did cover quite well for 2021.

And if you don't mind, Alan, I just have 2 more questions. One, regarding KSA and an improvement in KSA, is that because of the ease of lockdowns compared to the same quarter last year? And the second, given that you're managing Al Foah, you're managing Ismailia and you're managing [ Nabil ] and -- starting from April, going into these businesses and taking a hand on approach, what -- do you see anything -- any more work that needs to be done or less work compared to like when you're starting? So for example, with [ Ismailia ] you've mentioned that you restructured their debt. I was wondering, did you see any more positive, easier things to be done or a bit more difficulties?

So let me answer the second question first because I think that's an important one. I think as we look at the acquisitions, our attitude towards these businesses is -- or our approach towards these businesses, we set out our investment criteria. None of the focuses were buying need immediate management intervention in terms of commercial leadership. So I mean by that is these are good businesses that are doing well. The role of Agthia or the responsibility of Agthia as we take over these businesses is to maintain that momentum. So we want the commercial leadership to remain intact for a leap period of 6 to 12 months, where we will [ focus ] on a commercial business is how do we make 1 plus 1 equal 3, 4, or whatever the opportunity is. But we certainly don't want to make 1 plus 1 equal 1.5. I think we've demonstrated so far in Q1 that we're able to do that. What we are looking at, though, from a synergy perspective is some of the centralized opportunities. So how do we take our expertise in supply chain in R&D? How do we look at these specifications? How do we unlock potential productivity and cost in that regard? You mentioned the restructuring of finance in Al Faysal. Ammar and his team looking at the facilities, looking at everything to do with finance, auditing fees, all of these kind of things to say, look, where are our opportunities to save money? The way I would describe is commercial needs to carry on business as usual, and then we look for incremental rough synergies on top. And then everything else technically in the system, how do we optimize those, so that's piece on the integration. And by the way, one of the reasons [indiscernible] transformation office is to recognize that all the functions will do their piece, but the transformation office will make sure they adopt all of the bits in the business are held together, so we don't move faster, we don't move too slow. And actually, Al Faysal, during quarter 1, we realized that all of the functions we're taking up the management time of the Al Faysal business, and we said, "Hang on the minute guys." These guys have got a business to grow. So we backed off and focused on the priority areas. And that's why they are able to deliver good numbers. Just reflecting again on KSA. KSA is actually -- from a category perspective, there's a couple of phenomenons going on in KSA at the moment. So restriction were much tighter in KSA. That has continued to impact all channels. And what we've seen -- so our strengthened performance is really off the back of -- in Q1 last year, given we had some issues with bad debt. We really tightened our [ categories ] in KSA. We moved more to cash sales. We derisked our business. As a result of that, we slowed it down quite dramatically. So the category in KSA has actually declined. The price per liter has come under pressure. So the biggest suppliers in KSA are for volume. We're good to go for [indiscernible] in KSA is our market share is relatively low. We're still only nationally within 2.5% and 3% market share. And we said in our strategy that we see both in Saudi Arabia, in Kuwait, in Oman, opportunities to expansion. Now obviously, we've got to get our cost structure right because price later continues to be under pressure, but we believe we have the opportunities to do that. I hope I answered both of your questions.