Agthia Group PJSC (AGTHIA) Earnings Call Transcript & Summary

Hello, everyone. This is Hatem Alaa from EFG Hermes, and welcome to this business update call for Agthia. I am pleased to have on the call today, Alan Smith, the company's CEO; Ammar Al Ghoul, CFO; and Sahar Srour, Investor Relations Manager. We'll start with a presentation, and then we'll open the floor for Q&A. Just as an initial reminder to register a question, you can either type in the Q&A chat or click on the raise-hand button. Sahar, please go ahead.

Thank you, Hatem, and thank you, everyone, for joining us today. As mentioned by Hatem, we will start with a presentation, and we will walk you through a strategy update, and then with the financial impact on the recent announcement that we have just made. Over to you, Alan, please.

Thanks, Sahar. Good afternoon, everybody. We'll take you, as Sahar said, through this strategy update where we are, give you some context on, obviously, the new acquisition, give you some update on the recent businesses that we've already integrated and how they're performing. We get a number of questions around things like how are the individual companies performing versus the same period for them last year, so we've got some information on that to share with you. And also, we'll share some context on the Al Foah business because we've had obviously some questions around the seasonality. So we're going to take some time out to explain that impact and how it plays out in terms of the financials and what you should expect to see from the phasing in that regard. So just quickly just to recap on what we set out our long-term ambition to be -- to move from UAE centric to MENAP and beyond. Monetize, so partially commoditize portfolio. We wanted to move into the value F&B space, fairly stable financial performance into superior returns. And then obviously, bit more of a local organization mindset into a more consumer-centric performance-driven business. And obviously, that is -- we're trying to become a regional F&B leader by 2025. So that was the overarching long-term ambition. And if you look at the -- we said there was 3 pillars to help us get there; growth, efficiency and capability. So just on growth, we'll start there because obviously, that's where we've been moving the most. And if you remember, the growth pillar was all around the technical, but then grow beyond, so inorganic growth. So our most recent M&A activity, on April 7, we announced the acquisition of a 75% stake in Ismailia in Egypt, producer of frozen poultry and value-add beef and selling solely in Egypt, purely in retail, opportunities to grow, nice business growing well. And obviously, 200 SKUs across 4 core brands. Atyab is the #1 chicken brand in Egypt. And they're also #2 in beef. Sells products locally through its own distribution network and they also have a third-party distributor as well for certain regions. So nice business. And obviously, with this acquisition, very complementary to what we've already consolidated, which is the Nabil business. Brings our protein business to around the AED 800 million, AED 900 million range. Now obviously, our most recent announcement, September 1, we announced the acquisition of 100% stake in the BMB Group. UAE-based BMB actually manufactures a wide range of innovative contractionary healthy snacks and food products. It is a really entrepreneurial business, an incubator, an accelerator of healthy food brands across many snacking categories. And if you look at the brand profile below the ones to the right, the Brizelés, Recipe No.7, Roaster Adam, Smart Gourmet Freakin’ Healthy are all playing in that healthy food space. And then we have the more established brands such as Benoit, Melly's, Gardenia, Al Qamar, Simply BKLVA and Asateer. So a nice blend. And if we move on to the next slide, Sahar. So if we just briefly give you an overview of Ismailia here in a bit more detail. So just on the financials, AED 433 million if we look back for the last trailing 12 months. AED 76 million in EBITDA, obviously, nice margin at around 17.6%, so the deal is accretive for us. Category -- the last 3 years CAGR is 24%. So a very healthy growing business. Established in 2008, grown very rapidly to be #1 in chicken, processed chicken in Egypt, over 200 SKUs, as I said, a single production plant in Cairo and they are selling through a very strong distribution and sales network and they have over 2,500 employees. And you can see below the split in the categories. So we talked a little bit about this one before, but we'll give you a bit more context now on BMB. BMB was founded in 2007. Chocolate and bakery's ingredient trading business, and it's now evolved into a pretty well-diversified confectionery and snacking business. Portfolio includes Mediterranean sweets, chocolate, healthy food and bakery ingredients, and they sell it under 12 brands. They also own a stake in the KSA confectionary retailer Kottouf, which has a network of 176 stores across KSA, 140 of those stores are franchised. Actually, the co-CEO of Kottouf is actually the COO and runs the operations in Saudi. And they are the sole supplier to this retail network. So they manage all of the inflow and both sales of their own brands, but also the other brands that are sold through this retail network. They have -- BMB have 2 manufacturing facilities here in the UAE in DIP and Jebel Ali, and they're exporting to around 23 countries. So in terms of the last 12 months, around AED 270 million in net sales, AED 54 million in EBITDA, 20% margin, strong net cash position. And I think when we looked at this business, there was a couple of things that excited us. Firstly, the access to Saudi Arabia, it gives us a nice footprint there. Secondly, they've got a nice balance across the different businesses. And if you look below, you can see 50-plus percent is chocolate, 30% is Mediterranean sweets and ingredients and then the fastest-growing healthy food segment is currently around 4%. If You look geographically, KSA is 64% of the business; UAE, obviously is 18%, but the access to the U.S. market, they already have relationships with Costco and Walmart. In fact, they have a U.S. office based out of Walmart's hometown, so a very close relationship there. And obviously, they're selling to modern trade across the GCC. They also have a portfolio that's perfect for duty free, and also they're strong in e-commerce. So when we looked at them, I think -- and we started engaging with BMB, really, it was mutual interest. And why was it exciting apart from obviously what they're doing? We see the synergies between this business and Al Foah, obviously, having moved into that snacking space with Al Foah. They were super excited about the possibility to cross-fertilize between the 2 businesses and see how we can drive growth in snacking together. Next, please, Sahar. Just a little bit on their time line. So established in 2007, really -- 2 guys working out of a small kitchen. They continually upgraded. They have launched different brands. They built their first facility in 2005 -- 2015. They actually sold 50% of their business to a private equity company, Panarae, back in 2016, and they opened in the U.S. And then since around 2019, they started playing with these healthy brands. The first one was Freakin' Healthy. It was a joint venture. And then in the last 18 months, they've started expanding that with other start-up partnerships. So a very entrepreneurial team. And Obviously, the growth in the KSA network has been pretty dramatic and pretty fast growing to 176 stores. Next, please. So this just summarizes that. I'm not going to go through this. If you've listened to our presentations before, basically 5 transactions, 3 in snacking, 2 in protein. I'll show you in a couple of slides what that means in terms of the profile of the business. But you can see the ticket sizes, you can see the profitability, all around the 18% to 22% mark, and all good brands with opportunities to create value moving forward. Next please, Sahar. So what we said in our strategy document is we were going to drive our inorganic growth to give us a more balanced portfolio. And we picked out protein and frozen veg, snacking and food is the area where we wanted to further expand. And when you look at the portfolio now, and I'll show you the numbers in a minute, the business is roughly, once we consolidate everything on a pro forma basis would be, close to AED 4 billion, with roughly the same size across each of the 4 verticals. So it's starting to or it ties in exactly with the direction that we said we're going to have. We're driving efficiency. I'll show you some of the financials on Al Foah. So in terms of synergy extraction, you'll see some good progress on profitability improvements in H1 2021. And obviously, this will give us the opportunity to simplify our portfolio as well. And if you look at our commitment on efficiency, it was to save AED 200 million over the 5-year period of the strategic plans. We've already saved AED 25 million in the first half of the year. So good progress on the efficiency side. And this is what I was describing. If you look at the external chart, this is what the portfolio now looks like -- the external ring, sorry, this is what the portfolio now looks like with the businesses consolidated. So 27% food and water; around 25% agri; 26% protein and frozen veg; and then 22% in snacking. But the snacking and protein frozen veg is where we expect the growth to come in future because, obviously, the historic CAGR is pretty strong. So we will expect that portfolio to continue to evolve, as we said in the strategy documents, greater than 75% playing in consumer space. And we bought good businesses that have good growth potential. So we'd certainly expect these percentages on the left side to continue to grow. Next please, Sahar. On capability, obviously, we're capitalizing on route to market of acquired businesses and they're benefiting from what we have. So we're enhancing our access to new channels, new markets. Obviously, we have a nice portfolio that gives us the chance to strengthen our e-commerce and direct-to-consumer offering. On innovation, super excited about the snacks platform now with BMB as that comes in. We're already innovating through Al Foah, moving more into retail packs. So in quarter 2 this year, we actually grew our consumer business, our retail pack business in India by around 80% to 85%, which was a good step in the right direction. We're working on innovation. So we've actually launched plant-based protein in Jordan under the Nabil brand. And we're doing a lot on the dates ingredients and value-add products in Al Foah. And then obviously, we've got some great opportunities. We've got a balance between stable financially strong businesses and then our entrepreneurial spirit, whether it be with the BMB business and also actually on the Al Foah side with the innovations we're doing with the date platform. We've already gained some outstanding human capital, and one of the key parts of the BMB strategy was really to keep the 2 co-CEOs engaged, and make sure that they continue to drive the business moving forward, obviously, with the backing of our financial strength. And we're already sharing best-in-class systems and practices across the group. So between the 2 protein companies we're looking at rolling out a common ERP across those 2 sites. Next please, Sahar. Just moving into the financials. I think a lot of questions we've been receiving on like-for-like performance. So firstly, on Al Foah, if we compare H1 '20 to H1 '21, so our year-to-date performance in H1 was slightly behind on revenue. But I would say that volume growth was very healthy. We just saw a little bit of depreciation on bulk sales pricing, primarily because there was a bit of an excess, so there was a carryover of stocks in Saudi dates after the depleted -- or sorry, the reduced religious seasons in 2020 because of the impact of COVID. So the volumes remain strong, a bit of a dip on pricing. But I think the big progress that we're happy with and an example that we're integrating business as well is the step-up in profitability. So even with that lower revenue per kilo, we have been able to expand our net income from AED 11 million to AED 22 million in the first half of first half of 2021. So 100% improvement in the net income. And that's really come from the synergies we've been able to extract from the business, focusing on our overheads, getting the benefit of the back office and seeing how we can help them with line efficiencies, et cetera. Now I'll tell you a little bit about the Al Foah story in a minute. I'm going to show you what this looks like in seasonality in the next slide. Thanks, Sahar. I'll just run you through this. So firstly, if we start with the green bars. So date is a very seasonal business, and I will start in Q3 because, as of the beginning of August, we start to see the inflow of dates from the new season coming into our receiving centers across the UAE. We processed around 100,000 tons, 110,000 tons of dates here in the UAE, in our facility. The bulk of those dates can flow into the business in between, say, first week of August, September and October are the 2 peak months and then there's a little bit of flow into November. It really depends on the different varieties and when they mature. So we see the inflow coming in, in Q3. The sales start in the second half of August, September through to the end of the year is our peak selling period, and then you see some carryover in some of the sales into Q1 each year, which is selling in the -- for the Ramadan season as well. So that's really the selling cycle. Obviously, the impact of that is Q2 becomes our lowest period. And what we actually historically have sold in Q2 is leftover stocks from the season. Maybe stocks that didn't sell through because varieties were not wanted. So what we tended to do was to flush those out in Q2 to set us up for the season in Q3. I'll show you now, actually, one of our strategies is actually to, obviously, to deseasonalize the business as much as we can. And this is a good chart to kind of give you some sense. So quarter 1 '20, you can see the sales numbers are obviously on the high side. You can see the profit is positive. But last year in Q2, sales were significantly lower, as I said, for the -- that Al Foah carrying over a lot of fixed costs, so they made a fairly significant loss in Q2 last year. If you go to the far right, you'll see what we've been able to do. So slightly improved revenue base, and that's largely come from not so much bulk dates, but more retail packs. As I said, India has had a very good quarter. But we've also been able to optimize our cost structure. So my supply chain team, who are very good at managing seasonal products, have that understanding of how to manage through quiet seasons, have been able to reduce the operating cost during the downtime. And obviously, we still had a loss in Q2 but much less loss than last year, so a good start. Then you see Q3, the selling season, as I said, kicks in, in September, second half of August and September and then Q4 we start to see the business coming through much more strongly in terms of revenue and bottom line. So that's the profile of Al Foah. I hope that helps you all to understand why we saw a difference between Q1 and Q2 results. Getting back to the year-to-date performance on the other acquisitions. And again, this is all like-for-like from when we integrated. So Al Faysal was the end of January. You can see our revenue is down versus previous year. And that's largely driven because, obviously, Q1 in Kuwait and all markets last year was pre-COVID and Al Faysal have a strong reach into schools and into institutions. So obviously, they saw a bit of a downturn. But in spite of the lower revenues, we've been able to optimize the profit. So AED 7 million versus AED 5 million in the first half of the year. So really, good start to the year in terms of what's happened before. And obviously, we're excited now Kuwait starting to normalize as we get into the end of Q3 and Q4. Nabil, just the Q2 reported revenue. So like-for-like, you can see the comparison here, AED 85 million this year versus AED 80 million last year. Again, slightly improved profitability in spite of some input cost challenges. So still seeing that business ramp up, and there were some challenges in KSA specifically, just with import licenses, which is now resolved. But I think these 3 charts show you that in terms of integration, we're making good progress with the new businesses, and we expect that to continue. So that's it, I think, from my side. I will pass over to Ammar to give you some sense on the financials and our cash position. Ammar are you with us?

Can you hear me?

We can hear you now, yes. Over to you, Ammar.

Yes. Thank you so much, Alan. Good afternoon, ladies and gentlemen. So just complementing what Alan was addressing you with since the beginning of the presentation. So from an LTM perspective, we had an objective to share with you basically on a pro forma basis what would the picture look like on an LTM June 2021 for revenue, EBITDA and net profit perspective. And then in the coming slide, we'll also look at the same from a percentage perspective. And finally, we will touch base on the debt capacity, how we finance the most recent transaction, BMB, and where we are left from current borrowing capacity. So starting from the revenue side, as you can see, the newly acquired companies on a pro forma basis contributed 45% on revenue versus 55% from Agthia business before the acquisitions. And from an EBITDA perspective, 45% contributed 57% in an absolute value of EBITDA. On a net profit basis, the percentage is even much better. So the additional 45% revenue contributed 68% of the net income. From an absolute value perspective, respectively, Al Foah, Al Faysal, Nabil, Atyab and BMB, AED 435 million, AED 81 million, AED 378 million, AED 433 million, and finally BMB AED 268 million LTM June 2021 revenue. The same is for the EBITDA from an absolute respectively before 5 companies, AED 78 million, AED 18 million, AED 70 million, AED 76 million and for BMB AED 54 million. On the net profit as well, AED 50 -- AED 52 million, AED 12 million, AED 33 million, AED 37 million and AED 55 million for BMB taking the net profit on an LTM basis to AED 281 million. Thank you, Sahar. I wanted to address the audience on the gross profit margin bridging between an adjusted Agthia gross profit margin of 30.8% all the way up to 31.4%. As you can see, Al Foah contributed negatively by 0.2% as well as Atyab by 0.1%. As a matter of fact, that's not the dilution to the profitability of the company, it's just the nature and the business model of these 2 companies where the spending expenses below the gross profit margin got less than Agthia and the other newly acquired companies. Seen clearly in the bottom to the left chart where we look at the LTM June 2021 net profit, despite a negative contribution of Al Foah, the gross profit margin, positive contribution from net profit margin by 1.3%. Back up to the right side, LTM June 2021 EBITDA margin, again Al Foah excellent contribution from a margin perspective, 1.2%, supporting the increase of EBITDA margin from 11.5%, all the way up to 14.6%. Al Faysal, Nabil, Atyab, respectively, each contributed 0.3%, 0.7%, 0.5%, and then finally BMB 0.4% additional EBITDA margin. As in the announcement as to financing of the newly acquired company, BMB will be completely by a combination of debt and equity raising from Agthia cash reserve. This will reflect positively on the earnings per share at the year-end. So the net debt-to-EBITDA percentage post the acquisition will be 1.9x. So on the same metrics, net debt-to-EBITDA, we estimate 4x as the maximum ceiling for the reasonable borrowing, we're still left with nearly AED 700 million to AED 800 million of borrowing capacity. Obviously, in case that we have a sizable enough transaction for acquisition purposes in the future, we exit those number of financing means, including but not limited to perhaps probably placement in the future, maybe the right issues where the potential investors can participate in. So as a conclusion, we remain on a very robust balance sheet. Host, if I can turn for questions. Thank you so much.

[Operator Instructions] We have a few questions on the chat already. The first question is actually the same question from Zeeshan Bagwan and Karim Jetha, regarding, if you can shed some light on the historic growth rates for BMB Group.

From a return and share capital, the company enjoyed in the last couple of years percentage of above 15%. From a CAGR perspective, taking into consideration the headwinds of the COVID-19, we still look at nearly normalized and adjusted CAGR of above 10%.

Yes, the business slow -- was stable last year, so it didn't grow in 2020 versus 2019 because -- primarily because of the retail business continued to grow through Kottouf in Saudi Arabia, but they were impacted by obviously their B2B business on their chocolate ingredients and the bakery ingredients, et cetera. But the U.S. business grew, the Saudi retail business grew and, obviously, they started moving into the snacking space. So this year, I think on the trailing 12 months, the growth is high teens.

Question on -- follow-up from Zeeshan. On BMB, is the net profit margin similar to the EBITDA margins for BMB?

I'll take this one, Alan. No, as a matter of fact, the gross profit margin is in the 30s while the EBITDA margin as in the 20s.

Another question is on EBITDA versus net, so I think the...

Sorry, Hatem. So net profit is in the slightly below 20%.

So they are similar because the numbers are pretty much the same EBITDA and net income.

Yes. Just for me to add on this one. Basically, BMB's net profit includes a share of profits from Kottouf KSA under the EBITDA. That's why you have the similar amounts.

Hatem, just to add one point regarding the net profit margin and the EBITDA margin and the reason why they are close to each other. BMB owns 31% of Kottouf and the accounting for this part of the business for now, given the ownership is on the equity basis. So P&L will not be consolidated. Instead, BMB will capture share equivalent to 31% of Kottouf in Saudi Arabia's net profit and will be added directly in a separate line item in the P&L. And that increases the net profit without a significant impact on the net profit percentage to sales from a margin perspective.

A question from Imran Khan. Post BMB's whole cash acquisition, how much firepower in USD terms does Agthia have left for future acquisitions?

If we use, Hatem, the same criteria to calculate borrowing capacity on a 4x net debt to EBITDA, which I wouldn't assume that it will help any soon before approaching other means of raising cash, whether it's via equity raising or any other relevant mean, we estimated that we are left with between AED 700 million to AED 800 million of borrowing capacity, taking into consideration that we still have as a cash reserve invested on the balance sheet of nearly AED 720 million.

AED 700 million to AED 800 million, this is -- these numbers are all in dirhams, right?

Yes.

There is a question from the line of Fatima Al-Dosari with CCOR.

Just a question regarding the BMB acquisition. And given that 64% of their revenue is coming from the KSA, I was wondering is there any impact from the recent changes in import tax regarding companies that operate from Jebel Ali? And how will that impact the profitability of this business?

Okay. I'll take that one, Ammar. We actually did due diligence. As part of the due diligence process, we took -- we did an assessment of the risk on -- because some of their production is in Jebel Ali, some is in DIP. So we factored that into the acquisition calculations. And there is an impact, but it's already baked into the financials.

And do you know the impacts on the margins given that you've given up EBITDA margins of 20%?

I don't have it top of my head. Ammar, do you know?

Alan, we're in the process to evaluate where do we stand from a regulation perspective, given that we operate outside Jebel Ali. And the added value is significantly above the locally required percentage in Saudi Arabia. We're still evaluating this. However, I don't see significant impact on the profitability. And as you mentioned, we did consider the business in our valuation. So the value and the consideration is net of any possible future exposure on this.

A question from Yawar Saeed. When can we expect Atyab and BMB to be consolidated? And can you shed more light on the export restriction to Saudi Arabia? And what is the current situation? And does that affect BMB exports to Saudi?

Alan, I'll take the first part about the expected consolidation.

Okay. Okay.

So for Atyab, the transaction has been concluded already. Consideration was paid,control transfer to Atyab from the beginning of Q3. We're still talking to our external auditors. Perhaps we will start the statutory consolidation in early August, despite the fact that we really started their hearing and the termination, if I may say so, in the financial and operational policies technically from the beginning of the quarter. So just a high-level estimate, from the month of August, the statutory consolidation would start for Atyab in Egypt. As far as BMB is concerned, we're still waiting for regulatory approvals and hopefully, towards Q4 this year and at max at the beginning of 2022.

Thanks, Ammar. So on Saudi import regulations, obviously, they've announced certain restrictions related to; A, as Ammar alluded to, value-added content; and then there was also another condition related to levels of amortization or localization within the operation. So from the value-added contribution, there's absolutely no issue with any of the products manufactured in either of the 2 sites. I think the thing that we're evaluating in a bit more detail, as Ammar alluded to, is the amortization side of things, and how this is measured. I think in terms of imports to KSA, the implications of that is obviously depending on the category, there is import duty associated with the movement of those products into the Kingdom. And as Ammar said, we estimated that potential impact, and we factored that into the valuation and the price that we paid for the business. But for the moment, obviously, business continues as norm.

Question from Firouzeh Razavi. Are there any other acquisitions in the pipeline? And what is the end game of so many acquisitions? When will Agthia reach a satisfactory or a satisfaction level when it comes to its portfolio of companies?

So I think if we go back to the strategy, we want to be a leading F&B player in the region. We set that out as mean, up and beyond. That is -- remains our ambition. We also set out fairly key criteria of where we wanted to play, so which categories were of interest to us. And we set out what criteria we would have for evaluating those opportunities, good management team, accretive for the shareholders, good brands. So these principles, I think, for all of the transactions we've taken so far, we've been fairly consistent in terms of what we've looked at. Obviously, we continue to look at a pipeline of ideas, but they have to match the criteria we set out. So we're working on a very prudent approach in terms of the targets that we're looking at. We're fairly discrete in terms of assessing whether they meet the criteria. And to answer the question, we're still interested in potential targets, but we will make acquisitions if they make -- if they tick all the boxes per se. And I'd just like to say that we -- as I said earlier, we've got a fairly nicely balanced portfolio now. We've got 4 key verticals that we think we can build on. I think the other thing, as I mentioned, our core business, we -- or our heritage business, if you like, we intend to continue to reap the benefits of the efficiency we get from the scale of the new acquisitions. We would expect revenue growth to be relatively stable, but not significant. The disproportionate growth should come from our new acquisitions, whether that be in the snacking space with Al Foah and BMB or in the protein space with Atyab and Nabil. So that's how we see things. And obviously, as we've made these acquisitions, we've been pretty clear that we said "Look, our number one priority is that having bought good businesses, our first tick in the integration box is to maintain the performance of those businesses as we bring them in, to unlock synergies without damaging the growth of the business." And I think from the initial financials I showed earlier, we're doing that. So we're relatively pleased with the progress we've made so far. Obviously, we've now got Atyab and BMB to come. But then don't forget that these 2 will then have nice synergies with the existing snacks and protein businesses that we've already bought. So it's a well-paced integration process, not without challenges. But yes, we'll continue to look for opportunities. But we know that we're not just judged on what we buy. We're also judged on how we unlock value from those acquisitions and how effectively we integrate them into the company. So that's our core priority right now.

Question from Gunangad Singh. From 2022, how much EBITDA margin should we expect as synergies take place from all the acquisitions?

Ammar, do you want to pick that one up?

As a matter of fact, this is very much sort of expected guidelines that we prefer not to estimate directly, instead we focus more into maximizing the synergy capturing post the acquisition. And as mentioned by Alan, keeping the businesses that we bought, functioning the maximum, realizing the business plans that we bought the companies on and increasing the speed of integration between the newly acquired companies into earlier business model and its expenses.

But again, if you go back to the strategy document, we did highlight that we would be looking around -- from the EBITDA side -- or from the cost savings side, we'd be looking for around AED 200 million of savings over the strategic plan period. And as Ammar covered in the financials of Page 1, we delivered or we've been able to extract around AED 25 million year-to-date across the businesses.

Question from Divye Arora. Is there a connection between BMB and MCCL?

MCCL?