Agthia Group PJSC (AGTHIA) Earnings Call Transcript & Summary

This is Hatem Alaa from EFG Hermes, and welcome to Agthia's Full Year 2021 Results Conference Call. We'll start by a presentation from management, and then we'll open the floor for Q&A. [Operator Instructions] I'll now hand over to Sahar Srour, Agthia's Investor Relations Manager. Sahar, please go ahead.

Thank you, Hatem, and thank you, everyone, for joining us today in Agthia Group's earnings conference call for full year 2021. We have our group CEO and Group CFO, and Group Chief Corporate Services Officer with us on the call. First, as usual, Alan will give you an update on our 5-year strategy, followed by business performance highlights during the year. After which, Ammar will cover the financial results. We will then, as mentioned by Hatem, continue with the Q&A session. For your reference, this presentation is available on the Investors section of the website. Please note that we make -- this call may contain forward-looking statements, which should be considered in conjunction with the disclaimer included in the presentation. Thank you. Over to you, Alan.

Thanks, Sahar. Good afternoon, everybody. Thanks for joining us today. 2021 was a is a transformational year for Agthia, in which we revealed our 2025 strategy and commenced with delivering on its 3 key pillars. So as we look at those 3 pillars on growth, we continue delivering on our disciplined M&A strategy. We successfully completed the acquisition and consolidation of 5 new entities, creating our new Snacking and Protein segments. This is in line with the tactic of reshaping our portfolio mix shifting towards consumer businesses, which now constitute 70% of 2021 revenue. Financially, we doubled our top line in Q4, while recording 49% growth on a full year basis. We also expanded our normalized EBITDA margins by 391 basis points versus our guidance of 100 basis points per annum despite the inflationary pressures of 2021. On efficiency, as we came in front of exceptional inflation in commodity and price costs, we focused on selective pricing, while optimizing our cost structures and advancing our synergy extraction by a smooth integration of the newly acquired entities. Throughout 2021, we managed to optimize costs across the board, delivering AED 73 million or 36.4% of our 5-year target or commitment of AED 200 million, and that was largely driven by efficiency gains in existing businesses and synergy extraction from the newly acquired businesses. On business simplification, we decided to discontinue each of the Capri Sun, which was January '21, and our fresh juice business, which was May '21, businesses on recurring losses post excise tax that was imposed. Lastly, on capability, we continue to strengthen our revenue growth management capabilities as exhibited by the revitalization of our UAE water business from Q2 onwards. Clear decision-making about where to invest, which channels and brands to support and our cost of servicing our UAE water business grow. Examples -- other examples would be our efforts to diversify our home office delivery, which is creating accretive growth to the overall segment, whilst the addition of VOSS super premium space as part of a distribution agreement has allowed us to grow there. Additionally, to support the efficient and value-accretive integration of new acquisitions, we established our transformation office responsible solely for the seamless integration of the acquired companies into Agthia. Whilst realizing the integration is a continuous journey, which will require 2 to 3 years to reach full benefits, we next outlined the transformation progress that we've made in 2021, while setting the road maps for '22 and beyond. On that, Al Foah. So on Al Foah Phase 1 of the integration has been successfully completed as per our plan. We managed to resize and redesign the organizational setup and processes whilst unlocking cost synergies and operational efficiencies, resulting in a notable contribution to overall cost optimization targets and snacks bottom line. Al Faysal integration was directed towards process and governance, whilst ensuring business continuity and on track execution. Our focus now is to leverage our vital strong distribution network in Kuwait to unlock go-to-market opportunities in collaboration with Al Foah, newly acquired BMB businesses and our existing water business in Kuwait. We're just in the process of consolidating that under one management team. Nabil and Atyab, post the acquisition of Atyab, our approach has now shifted towards creating a fully focused protein business unit, which again marks our diversification strategy of expanding Agthia's categories. As we advance on the completion of the first 100 days diagnosed of Atyab, we focus on setting up the process business to extract potential synergies, both in terms of cost and in terms of revenue generation across the Group. BMB, we completed the acquisition in December. The first 100-day plan has commenced and the focus is really safeguarding around business disruptions, but maintaining the agile and entrepreneurial business culture that attracted us to BMB. This is all aligned with the rationale behind acquiring BMB as we seek to target sizable opportunities on new product development, go-to-market synergies and possible consolidation of production sites. Across the board, from every acquisition we exceed to extract maximum cost synergies while leveraging into group assets and relationships to open new avenues for revenue generation. This sums up our strategy integration update. I'll move now to the business performance. This slide takes a look at our performance by segment. You can see we are depicting the evolution of revenues this year versus last year. The inner ring resembles '22 -- '20 revenue of AED 2.06 billion, growing by 49% to AED 3.07 billion in 2021, as is shown in the outer ring. Segment-wise, contribution of protein and snacking verticals jumped from 6% and 1% last year to 21% and 18% this year, whereas Water and Agri went down from 48% and 45% to 31% and 30%, respectively. This is now in line -- this is in line with our growth strategy of diversifying our revenue streams towards higher growth strategy, 70% contribution now comes from CBD. So if we get into the details on the specific segments or the specific verticals, we can go to the next page. So if we start with Water and Food segment, which covers our water, beverage, dairy and trading items, sales came in at AED 941 million. In the UAE, our HOD 5-gallon volumes were up with the return of corporates and favorable mix management. We did some selective pricing across the portfolio. The bottled water category in 2021 was impacted by weak sales in Q1 2021, which lagged the very strong pre-COVID Q1 in 2020. In fact, water category on a full year basis actually grew 2% in volume terms last year, which shows the second -- or the second half of the year, the category returned to healthy growth. In Q2 onwards, however, higher sales were recorded versus the same period last year, driven by the revival of our foodservice channel. Our international markets performed well despite prolonged COVID restrictions in both KSA and Kuwait as we focused on expanding our footprint and trying to grow share. We continue to concentrate on improving the cost structure and route to market optimization to drive scale and efficiency across channels as a metric for the improvement of our Saudi operations. Profitability of the water segment, however, was dragged down by increased promotional intact, higher PET resin prices and inflationary pressure on packaging and freight. As for beverages, lower sales for the period reflect our mutual agreement to exit from Capri Sun and our discontinuation of the loss-making juice products, both of these decisions to enhanced the P&L on a full year basis or enhanced our profit on a full year basis. Our other food items, which is our dairy and trading items, sales stood at AED 168 million in 2021, a 13% revenue decline relative to the previous year, largely as we had a strong 2020 driven by COVID-19-related demand in the CSD division. Nevertheless, together dairy and trading items reported higher sales versus 2019, driven by portfolio expansion and competitive promotion. Before turning to other segments, let's take a closer look at the dynamics of the UAE water category across key channels. In retail, overall category came in flat versus last year, which was severely impacted by COVID-19. As per Nielsen 2021, category value was flat despite a volume increase of 2%, which shows the ongoing competitive landscape. We did see a gradual increase in pricing in the category as the year progressed as manufacturers reflected some of the input costs into their prices. However, Agthia's bottled water portfolio continues to preserve market leadership at 26% and 23% volume and value share, respectively. Al Ain showed resilient performance, driven by our strategic pricing, promo mechanism implemented from May onwards. And we also reinvested in the brand with some specific events around the 50th anniversary. Multiple insight, few marketing programs were affected above and below the line to drive consumer awareness, equity and purchase and additional support came in from our laser sharp focus on driving fundamentals and best-in-class execution. Foodservice, high momentum continued in 2021 with this channel bouncing back 29% up versus last year, post-COVID relaxation and new accounts driving AED 27 million in our top line. Our distribution agreement with VOSS commencing this year further supported driving value. We expect this trend to continue driven by opening up of economies with the vaccination rollout. In the municipality channel, we had lower footfall and competitive pricing by retail impacted. So overall, it was down around 25%. And additionally, the shift in reporting system from sell-in to sell out direct-to-consumers further affected the comparison of reported top line, but actually brings us a much more realistic and closer to consumer business. We remain orientated towards revitalizing our water business by marketing activations rolled out across key accounts with Al Ain being the focus, again, trying to drive our mix. Carrefour delivered the highest ever value and volume share in October '21 for the first time since 2019. Revenue management initiatives via strategic pricing to cover increasing PET costs, while retaining our leading market share and optimizing costs. So we're looking at how we better invest our trade spend, negotiate better terms with key retailers and enhance primary effectiveness. We also focused on driving route to market optimization to ensure our effective coverage, but in the most cost-effective way. Moving on to protein and frozen vegetables. Under protein, we consolidated Nabil since April 1st and that's a absence since August 1st, collectively contributing AED 534 million in top line. Sales of frozen veg tomato paste were flat versus a higher base last year. In the next slide, we shed light on the performance of each Nabil and Atyab, pre- and post-acquisition, noting that the figures represent a comparative period post consolidation date. Nabil reported AED 304 million in Q2 onwards, which was up 8% versus last year despite export challenges to KSA, Iraq and Kuwait. Atyab, which was only consolidated starting August, reported a 29% year-on-year jump in sales on higher volumes and pricing. Profitability on both Atyab and Nabil was impacted by higher raw material costs. Nevertheless, both businesses continue to enjoy attractive margins. Turning now to the Snacking segment, Al Foah dates recorded AED 46 million in top line for the full year 2021. Al Faysal Bakery added AED 92 million to the top line. Our bakery business in the UAE was lower versus last year, which had benefited from partnerships with local authorities through our food security order in 2020. As we look at the comparative performance of our snacking portfolio, pre and post consolidation, Al Foah reported slightly higher revenues on higher volume as we focused on strengthening our presence in the Retail segment, which more than offset the pricing pressures from KSA over supply. Profitability was significantly improved versus the same period last year on lower direct material costs and obviously, our overhead optimization post integration. Al Faysal had a good year, reporting higher sales supported by an increase in volumes, specifically in Q4 after COVID-19 restrictions eased in Kuwait and profitability enhanced on a much favorable sales mix and cost optimization initiatives despite higher input costs. If we finish with our agri-business, which includes flour and animal feed, Flour segment lagged last year on top line, which was driven by a 30 -- a one-off AED 39 million order to the World Food Program and another AED 28 million related to weak trading, we decided not to participate in those this year because the profits were relatively low. Animal feed revenues were higher versus last year on improved pricing and mix in our core feed business. For our subsidized feed business, which is around 37% of total feed sales, we work proactively with the government authorities and agreed with them appropriate pricing adjustments from August 2021. That reflects the reality -- sorry, that reflect the reality of the current global commodity costs. Additionally, H1 2021 adverse of impacts of higher grain cost was mitigated by a catch-up in Q4 2021. Profitability has come under pressure due to escalating commodity and freight costs, although a large proportion of that impact has been offset through a combination of pricing efficiencies and cost savings across both the categories of Flour and Feed. Situation remains very fluent on the commodity outlook, and we are monitoring this closely to make sure we have the appropriate interventions in place. That finishes my summary. I will pass over to Ammar to give you more detail on the financials. Over to you, Ammar.

Thanks, Alan. Hello, everyone. So the group net revenue reported were AED 3.68 billion, which registered a 49% year-on-year growth, largely driven by the consolidation of the 4 newly acquired entities. With the addition of the 4 acquisitions under the Consumer Business division, which I will refer to later as the CBD, net revenue contribution from the CBD increased by 15% year-on-year, all the way up to 70%. CBD continues to shape its portfolio as inevitably positive and growing contributor to our P&L, in line with our 2025 strategy. Gross profit in 2021 of AED 957 million translates into 31% margins, flat versus last year despite the higher direct raw material costs on a global inflation. On a net level, reported net profit for 2021 came in at AED 260 million versus AED 35 million last year. Excluding AED 41 million of M&A and transformation associated costs from this year and AED 83 million one-off provisions from last year, normalized net profit will reside at AED 257 million, more than doubling versus last year. To elaborate on the margins, on a normalized basis, EBITDA margin enhanced by 3.9% year-on-year, driven by the consolidation of 4 margin accretive entities and cost optimization via integration and productivity enhancement, which more than offset higher raw material and freight costs. SG&A expenses that includes R&D as a percentage of sales went down by 5.2% versus last year as we continue optimizing our cost structure. Net profit margins were up by 2.7% on improved EBITDA margin, which more than offset higher finance cost on a debt financing of acquisitions and higher noncontrolling interest contribution mainly from the acquisition of Nabil and Atyab. During the same period, we managed to improve our returns, driven by the addition of the value-accretive acquisitions. Assuming 5 acquisitions, including BMB were consolidated since the beginning of 2021, return on equity enhanced by 5.4% to almost 12%, while the return on capital employed would have been improved by 2.7%, almost 8%. So to reconcile the top line, on a stand-alone basis, revenue stand at AED 2 billion, AED 163 million related to last year one-off work food program flour order and net grain trading alongside lower bottled water and beverage sales in UAE were marginally countered by a robust growth momentum across our international operations and the agri-business. Nevertheless, the consolidation of Al Foah and Al Faysal in Q1 and Nabil in Q2 and Atyab Q3 resulted in the inorganic growth, taking our net revenues to AED 3.07 billion approximately. Moving on profits, excluding AED 89 million one-offs recorded in 2021 of provisions plus work food program and grain trading profits, net profit on a stand-alone basis was slightly impacted by lower UAE water and agri margins on a higher raw material cost, which was particularly sizable in H1 of 2021. In the Agri segment, the pronounced impact in H1 2021 was particularly evident in the subsidized commercial farms channel sales, wherein we were not able to reflect the witness upsurge in the grain cost and the selling prices given the post price cap, post our dialogue with ADAFSA, we were given the green light to increase the price starting from the month of August. And the impact in H1 was mitigated in Q4 in 2021, where we received a catch-up compensation to make up for the H1 sizable inflation impact on the subsidized channel. It is also worth mentioning that despite the decrease in beverage sales post the business discontinuation, profitability was positively impacted in '21 as a result versus last year, reflecting our strategic decision on rationalizing SKUs and divesting loss-making businesses. After accounting for the consolidation of the 4 acquisitions and associated costs, earlier consolidated net profit prevailed at a reported AED 216 million. In the next slide, we do a reconciliation to show the contribution of each of the newly acquired entities to our top line and bottom. Al Foah and Al Faysal which were consolidated in Q1, now constitute 15% and 3% respectively of the total Group revenue. And Nabil which we consolidated in Q2, makes up 10% of the total revenue, whereas Atyab which was only included since August makes 7% of the Group's revenue. Now let's look at the cash flow and the balance sheet. Our resilient operations continue to underpin our robust liquidity position as we remain focused on working capital overall with improved cash cycle resulting in a strong cash flow generation. Our working capital as a percentage of sales improved by 4.4% year-on-year, with a better cash conversion cycle less by 15 days even after adding the new entities. In terms of capital structure, as we consolidate the new businesses, total CapEx increased in value, yet the bulk pertains to maintenance CapEx. As you can see on the slide, the absolute value grew from AED 71 million to AED 134 million. Out of the AED 134 million, AED 66 million purely driven by adding the 5 newly acquired companies. And on a stand-alone basis, earlier maintenance CapEx were only AED 68 million, AED 3 million versus last year. Improved operational performance with constrained CapEx requirements translated into significant enhancement in the free cash flow, 12% of the sales in 2021 as a percentage versus 11% last year. We also note that free cash flow was further lifted in the inclusion of the acquisition of the healthy cash flow management. Not in the slide, but important to note is that the cash flow generated from operating activities as seen in the statutory financial statements are AED 514 million. Next slide, please. Talking of the -- as part of the capital structure on the debt capacity, we now take a stock into our robust balance sheet. Our leverage ratio remained attractive with 2.1% net debt-to-EBITDA report despite raising new debt to fund in Faysal, Atyab and BMB as Nabil earlier. We continue to enjoy relatively low average cost of debt. Talking of the dividends and finally as we continue delivering our strategic pillar, we remain committed to further increasing our shareholders of Agthia, in line with our recently announced semiannual dividend distribution policy, the Board recommended AED 0.0825 dividends per share for the second half of 2021 on top of the distributed AED 0.0825 dividends per share for the first half of 2021. If approved by the shareholders, total dividend distributed for the year 2021 will amount to AED 130.6 million versus AED 118.8 million in 2022. With this, we conclude our prepared remarks for the period. We open the floor for Q&A. Thank you.

Thank you very much. [Operator Instructions] we'll take the first question from the line of Nishit Lakhotia. Your line is open.

Thank you for the call and very well done on 2021 and all the best for 2022. I have questions mainly on what's happening in the globe right now on the commodity space and where the wheat prices have gone up and already you mentioned about raw material pressure even in Nabil, Atyab, and the pet prices. So I wanted to understand on each of your businesses, how you're going to mitigate because of the extreme prices that you've seen? And also given that we is a very sensitive, flour prices are very sensitive to the government on the inflation. Would you be able to totally pass on the cost? Or would there be any subsidy that the government might give so that the end consumer is not really affected in Abu Dhabi. So more color on this aspect would be very helpful. I know it has multiple questions inside this, but mainly all your raw materials from key businesses, even higher grain, all, how do you see this impacting this year? Would you be able to even sell your feed at much higher prices? Would you -- have you asked the government for more leeway in your subsidized channel to further increase feed prices, so yes, that's my question.

Thanks for the question. Obviously, it's top of the agenda at the moment. I think look, inflationary pressure in all categories is where they've been there probably now for 15 months, I think we started to see commodities rising in Q4 2020. And that kind of trend continued through last year. I think as you look at our financial results, we've been very proactive in kind of managing our pricing. You saw, I think the -- on the profit net of pricing, the impact was AED 4 million on a full year basis. And when you think just on our cost -- adverse cost impact last year, it was around AED 121 million that we were largely able to offset in the business. So we very actively look at our forward coverage on all materials to be perfectly on. Nice to understand how that's going to impact the P&L by month by quarter. And then we work with the commercial teams and the supply chain teams are looking at a couple of things. Obviously, pricing to try and offset the impacts and secondly continuing to drive the cost synergies and the operational synergies in the business to offset that. Now if we just take a look, obviously, the last 3 to 4 weeks, we've seen some exceptional changes. We are already -- we're always -- from a commodity perspective, we run a monthly commodity committee review where we make decisions on coverage and how far to take out, what positions to take, et cetera. So as we stand today -- actually our biggest challenge, our biggest worry a couple of weeks ago was around supply more than price. We are now covered on many of our materials through July, some of them through Q3 into Q4. So obviously, we've taken the cost impact into account. We're now looking at how we deal with those issues. I think we cannot comment on what the government may do around this because as you alluded to, there's many impacts across the board. But what we can say is last year, you saw a lag in our profitability in the first half of the year because of the discussions that we were having over the subsidized fee businesses. We had already signed off the mechanism moving forward with the government on how we fix that. So in December, we set the pricing for the first half of the year. We've already opened dialogue with them about exceptional movements that we've seen in the last couple of weeks and what adjustments that we need to make there. So we kind of get away from the fact that the current phenomenon is quite exceptional, but we are also very focused on making sure that we continue to protect profitability in the business.

So just to add on that, Alan. So you are saying you have 3 to 4 quarters of stock in terms of wheat right now to manage the current prices. I mean you don't have to procure at these prices? You have enough inventory?

What I'm saying is we -- with the last purchase that we made, which was last week, we have coverage out to end July on one material, end of Q3 on another and a little bit longer on the final one. So we have a coverage position. So we have a -- what I'm saying is we have a bit of time to see what's going on in the market. We're obviously consulting as well with our partners to see at what point we should make a coverage or option decision. So it's a fluid situation, but we're meeting on this now weekly. We have a lot of experience and expertise in the group on what, when, how and where to make decisions. But it's a very fluid situation, as you can imagine.

But I understand there was lot of competition from Ukrainian flour in the past. So how is that now changed?

Actually, the reality on our situation is we do not buy any wheat from Ukraine. The majority of our wheat is coming out of the region. Even our other commodities are not coming out of Ukraine. The impact we're seeing is obviously the knock-on effect of Ukraine and Russia on the global prices. So what we're making sure of, first and foremost, is that we secure supply. And that's what we've done in terms of the coverage positions that we now sit on. So look, it's a global commodity. So globally, the prices are going to fluctuate depending on the situation. But I think given our experience of the last 12 to 15 months, I think we've demonstrated an ability to protect the overall P&L.

Okay. So just one final thing on this that given that Egypt is totally exposed on the wheat imports from Ukraine. Is there any possibility of you exporting to Egypt from here?

It's not something we're looking at, at the moment. I think the Egypt situation on wheat, I know that they are exposed to Ukrainian supply, but the reason we're seeing pricing going up across all markets is obviously those countries that are impacted by availability from Ukraine are obviously looking elsewhere for supply. So I don't envisage us supplying retail flour to Egypt at this point in time. But we'll see how the situation evolves.

[Operator Instructions] We will take the next question from [ Stefan Mur ].

Congratulations on a very strong quarter. My question is for Mr. Ammar. He mentioned about receiving the compensation from government for the first half of '21 in Q4. I just wanted to know what was the quantum of that compensation.

AED 36 million.

AED 36 million. All right. So accepting this and the one-offs you had, should we expect this run rate of Q4 to sort of continue going forward?

No, no. I think when you look at -- Mr. Stefan, when you look at our Q4 revenue, I think what you can see is that -- so it's AED 950 million, 100% increase on prior year. When you consider that Q4 was the first full quarter where we had 4 of the new acquisitions in the P&L. We believe that, that is a good indicator of outlook moving forward. I would say a couple of cautions on that from a profitability perspective. Obviously, we've mentioned to you previously that our dates business is quite seasonal and our 2 core quarters for the dates business is Q4 and Q1. So that is one factor to consider. But yes, in revenue terms, I think Q4 is very indicative of where we expect 2022 to be lucky.

[Operator Instructions] And we have a question from [ Alok Nawani ].