Agthia Group PJSC (AGTHIA) Earnings Call Transcript & Summary

Hello, everyone. This is Hatem Alaa from EFG Hermes, and thank you for joining us on today's call covering Agthia Group's first half 2023 results, hosted by Alan Smith, Group CEO; Sherif Elfaham, Group CFO; and Roger Tejwani, Investor Relations Director. As usual, Alan will provide an update on the progress of the 5-year strategy and then Sherif will cover financial performance during the period followed by the full year outlook and then we'll open the floor for a Q&A session. For your reference, the investor presentation is available in the Investors section of the company's website, agthia.com. Please note that the contents of this call may contain some forward-looking statements that should be considered in conjunction with the disclaimer included in the presentation. Alan, please go ahead.

Thank you. Good afternoon, everybody. Thank you for joining us today. I think firstly, we achieved strong and profitable growth in the first half and remain on track to meet our full year guidance. We continue to make good progress across our 3 strategic pillars of growth efficiency and capability. So our net revenue increased 10.3% year-on-year or 20.2% if we exclude the currency headwinds in Egypt. Like-for-like revenue growth, including Abu Auf was 3.1% or 12.3% excluding the currency impact, with double-digit growth coming from our Agri and Protein business, excluding ForEx, a mid to high single-digit growth coming from our Water and Snacking portfolio. Our ability to generate synergies across the group and our enduring cost discipline resulted in AED 34 million of productivity gains in the first half and EBITDA margin expansion of 98 basis points. In Egypt, our focus on leveraging our assets with manufacturing of the key export markets has led to an increase of 18% in export revenue in AED terms, in Dirham terms. And this was underpinned by new food service volumes in regional markets such as Jordan, Kuwait and Bahrain as well as vegetarian and plant-based orders into new international markets. Our most recent acquisition, Abu Auf, is now selling Date Crown and BMB ranges through its domestic channels in Egypt and sourcing Egyptian dates for Al Foah for export and scoping opportunities to further increase export of its branded premium coffee and nut products. We also made good progress in expanding our in-house capabilities for future-proofing growth through accelerating innovation to meet the evolving needs of consumers through, for example, product and packaging innovation and snacking, you see that we have such great products such as chocolate and raw date, snap packs, date pouches and new travel retail or duty-free range as well as the new functional water with [indiscernible] fortified with zinc and magnesium to meet the growing demand for healthy products and lifestyles. We were pleased to win the quality standards award issued by the Ministry of Industry and Advanced Technology in the Emirates Forum and that was in recognition of our commitment to setting a new benchmark for the industry and providing our consumers with consistently secure and reliable food products. We have made great progress in our digital transformation road map by creating foundations to transform Agthia into a consumer data-driven organization. We are proud to be one of the first UAE companies to launch Microsoft CoPilot in our water home delivery contact center, improving our services to and interactions with customers. We also finalized the memorandum of understanding cooperation with Microsoft, which enables us to accelerate our B2B route-to-market digitalization, improve operations in retail, modernize our internal ways of working and increased employer engagement and productivity. Post the period end, we were excited to launch Agthia Ventures. Agthia Ventures is a corporate venture capital fund, and that's really designed to expand Agthia's innovation capabilities an increased avenues for profitable growth in both new and existing markets. Co-funded between ourselves and ADQ, the fund will be managed together with Touchdown Ventures who are a global leader in establishing and operating bespoke CVC programs for blue-chip corporates, with over 100 completed venture investments so far. Investments will focus on opportunities in branded products and emerging food and value chain technologies globally. For example, in Snacks and Beverages, novel ingredients and alternative proteins, Innovative Packaging solutions. Our target investment interest include premium and better-for-you snacks and beverages, functional water and hydration, alternative proteins, sustainability solutions in farming and packaging, e-commerce solutions for the food and beverage industry, and other capability enhancements relative to Agthia's value chain. I will now hand over to Sherif, who will give you some much greater detail on our financial performance. Over to you, Sherif.

Thank you Alan. Good afternoon. Good morning, everyone. Let me take you through the details of the financial performance. We're pleased to deliver strong and profitable growth in the first half. As you have seen, group revenue increased 10.3% year-on-year, up to AED 2.2 billion. Growth was balanced with around 3.6% coming from pricing, 6.7% coming from volume as greater diversification across the business underpin product to [indiscernible] optimization throughout [indiscernible]. Like-for-line growth was positive across all the 4 verticals, excluding the currency impact, 3.1 growth at the group level. Adjusting for the adverse impact revenue of currency devaluation in Egypt of around AED 197 million, the group net revenue increased by around 20.2% year-on-year, with like-for-like revenue plus 12.3% year-on-year on adjusted basis. It is worth noting that we're actually pricing the digital revenue growth in the quarter 2. Notwithstanding the continuing currency headwind and some demand phasing coming from the earlier Ramadan and the last [indiscernible] in the second quarter. Historically, from a seasonality point of view, Q2 almost used to be softest quarter for the company because it's completely outside the date season. Yet, we've been able to deliver a strong 8.1% growth in the quarter. EBITDA growth was ahead of revenue, up 18.3% year-on-year to AED 390 million or 31%, excluding the impact of Egyptian dollar devaluation. This was underpinned by strong growth in Snacking and Water profitability, combined with a laser focus on profit protection in Egypt and further efficiencies [indiscernible]. Group EBITDA margin increased by around 100 basis points year-on-year to 14.5%. Q2 EBITDA margins also improved by around 100 basis points year-on-year. This [ acquisition ] of Snacking, Protein, Water and Food, fully offsetting the commodity-related margin compression. Group net profit increased 6.6% year-on-year, AED 144 million after absorbing an additional AED 34 million of interest costs resulting from the higher interest rate environment which is approximately around 1.5%. Worth mentioning that these strong results has been delivered in a continued challenging environment. We continue to see commodity inflation in the first half around AED 46 million, largely in our Agri Business, in [indiscernible] and also in Egypt because of the currency devaluation impact. Currency devaluation in itself has a strong impact on the business performance. As previously mentioned, [indiscernible] profitability in Egypt, we've been able to navigate through the current challenges. Rising interest rate is also a continuous challenge. If you look at the LIBOR has mostly been 1% to 5.2% if you compare this period versus the base period, which resulted in around AED 34 million additional interest cost in the first half. If you look at the top line bridge, as we said, the growth was quite strong, 10.3%, well balancing between pricing and volume, 3.6% pricing, 6.7% volume, excluding the devaluation impact of [indiscernible] 20.2% rate devaluation. We're pleased to see around AED 140 million coming from the inorganic growth, the acquisition of Abu Auf business in Egypt, that was done in November last year. Water and Food continue to contribute positively. In a competitive category, Agri Business has done quite well, AED 63 million come from Agri. Snacking business has contributed AED 49 million. And Protein, unfortunately of course, has been impacted by the currency headwinds that are showing around minus AED 75 million. If you strip out the devaluation impact, probably [indiscernible] AED 125 million. If you move to the next chart. If you look at the EBITDA. EBITDA growth was ahead of revenue. So as we said, we've been able to improve the EBITDA margin by 100 basis points. EBITDA growth was 15.3%. If you exclude the devaluation impact, it is probably higher than 30%. Inorganic is contributing around AED 35 million, followed by Water and Food also positively contributing AED 10 million. Agri in spite of stabilizing softening commodity input has been able to contribute another AED 5 million. Snacking is also having a strong contribution of AED 23 million and Protein is having an impact of minus AED 10 million as well as plus or minus AED 15 million, which is largely [indiscernible]. If you look at the net profit, it's a similar pattern and profit the acquisition of Abu Auf contribute AED 10 million, AED 15 million coming [ positively ] from Motor and Food. Snacking contributed AED 5 million. Snacking, Protein, and Food [indiscernible] AED 6 million after absorbing AED 20 million devaluation impact and this has been offset by AED 39 million, of which AED 34 million is incremental year-on-year interest cost and AED 5 million is a net digital investment. We continue to strengthen our balance sheet. So we have been able to repay around AED 600 million debt in the first half, and that helped us reduce our interest burden and interest cost by around AED 35 million. We improved net debt-to-EBITDA to 2.3% or 2.3x at the end of last year. It's now about 1.9x. Interest coverage is very healthy at 6.6x and we have a liquidity room up to additional AED 2 billion where and if needed. Dividend yield is 3.2%, slightly lower than the historic level, impacted by the positive increase in the share price in the first half. If we move to our segment performance. We have now much more than of a suffice and growing portfolio in the [indiscernible] market. In terms of geography footprint, 50%, 51% for our business comes from UAE. We have 26% other Arab countries, mainly Jordan and Egypt. GCC excluding UAE is 16%; and rest of the world is [ 57% ]. In terms of segment of business unit, we have much more balanced portfolio than we were a couple of years back between Protein and Frozen, Water and Food, Agri and Snacking, roughly, each of them is around [indiscernible] portfolio. Also pleasing to see all the 4 categories have positive like-for-like growth if we strip out of currency impact. We are happy to see all the 4 categories delivered strong growth for the first half. Snacking was the leading category in terms of growth and profitability improvement, plus 45% revenue growth, benefiting from the impact of the acquisition of Abu Auf. If you strip, cutout, the growth was around 8.5%. EBITDA margin improved significantly by 83%, which is also quite strong. Within that, Dates continue to perform very well with strong [indiscernible] growth strategy, doubling down in countries like India, holding market in Indonesia, Malasia, Brazil. We also premiumize driver mix shift in all retail market and reducing premium its range like [indiscernible], et cetera, and we continue to drive innovation in that category. [indiscernible] focus on channel and distribution optimization [indiscernible] BMB and they have a strong contribution for the half. Now all the local currency growth was really quite strong, close to 70% year-on-year on the back of a strong pricing but also share gain in the all three businesses. If you move on to Protein. I think Protein [indiscernible] business decline is 13%. That's impacted the currency really after observing AED 200 million currency headwind. If you exclude that, that goes to 21% year-on-year. This impact at equity and effective [indiscernible] double-digit growth in the Frozen vegetables and Tomato business. Large part of that is export driven, which is pleasing to see. We have managed to increase our export to South Asia by around AED 7 million, total as a group of around 15%, which was a very strong [indiscernible] during this period. Jordan showed strong growth in retail exports offset by lower food service retail in Saudi and [indiscernible] competitiveness in the local market in Jordan. EBITDA grew around 27%, excluding ForEx devaluation, on a reported basis, this declined by 12%, but we prioritized profitability and drove a very strong efficiency program that helped us to improve EBITDA margin by around 10 basis points despite the currency headwinds. If we move into Water and Food, we are very pleased to see the growth of around 6%, 6.5% in [indiscernible] category. At the same time, significant improvement in EBITDA. Growth was largely driven by [indiscernible], and we're very pleased to see obviously turning around both top line and bottom line, equally strong growth in [indiscernible]. For the quarter, we held our market leadership position, which is very positive. And EBITDA margin had a significant improvement from deposit optimization, rationalization and premiumization program introduced the new innovation of [indiscernible] recently, which is an enhanced quarter [indiscernible]. Agthia has a strong resilient performance despite significant commodity inflation, delivering 12% growth, both in [indiscernible], driven by stronger market execution and strong volume growth. EBITDA was also improved by 6%. EBITDA margin compression is due to lower mix and some [ backward ] pressure in the market. With a strong performance in the first half, we are pleased to reconfirm our full year guidance, which is a revenue growth of 10% to 12%, as the ForEx rate of Egypt is repositioned around 30.7% and excluding any further acquisition. EBITDA margin improvement 40 to 60 basis points for the year, improve net profit margin 30 to 50 basis points for the year. With that, let me hand over to Alan for his closing remarks.

Thanks, Sherif. So there's much to be proud of from our side over the last 6 months, whether that be from innovative product launches into new and scalable markets. We strengthened our Board and our leadership team. We've launched a bespoke venture capital fund that will future-proof our R&D capabilities and offer additional avenues for profitable growth. The efficiencies we continue to generate across our portfolio are enabling us to excel [indiscernible] investments in capacity, sustainability and digital excellence while maintaining that robust balance sheet. The economic backdrop characterized by inflationary headwinds and currency volatility has required us to remain disciplined and agile in our execution and I'm grateful for the continued support and dedication for all our colleagues across the group in achieving this strong first half performance. So I look forward to sharing Agthia's continued progress with you as we take the business from strength-to-strength. But for now, thank you for listening, and we will open the floor for Q&A.

[Operator Instructions] The first question comes from the line of Nishit Lakhotia.

I have a few questions. First, on the exports from Egypt. Can you maybe share what is the exact value of exports currently in Dirham terms from Egypt? And where do you see this going in the next 2 to 3 years? That would be helpful. Second, on the Agthia Ventures, I'm assuming Agthia would be contributing around AED 100 million, so this will be from their own cash reserves? And how would this be accounted? Would it be like a JV or consolidated? Any clarity on that would be helpful. Third, on the amortization change, given that last year, there was a huge addition of brand value on your balance sheet of AED 282 million through acquisition. This year, Agthia decided to not amortize it by changing the definition from definite to infinite life. Isn't this being aggressive in terms of accounting? Any comments from management? And finally, on the merger and acquisition front, is there anything that's expected this year or Agthia is now looking at going a bit slow on the M&A front, given the high cost of funding? Any comments on that?

Okay. Thank you very much. So let me try to answer your four questions. The first is about export sales from Egypt. So annually, we export close to AED 70 million out to Egypt that's largely Frozen vegetable and Frozen food. We increased that in the first half by AED 7 million, half of it roughly in the Frozen Vegetables and Frozen Food and the other half is from Dates, who are off business. So that increase is quite healthy in the first half is almost close to 18.5%, it was annualized. So that's the magnitude of export in Egypt. We have created a dedicated export team out of Egypt to maximize that also include routine export. And we want to keep on driving on that [ front ]. On the second point on the venture, I think the total investment is around AED 200 million over 5 years, actually. It is not in a short term. And the venture capital is funded jointly by Agthia and ADQ. The funding is a 25%/75%, so 25% Agthia and 75% ADQ over a 5-year period. The accounting treatment for those investments will be, of course, associates and JVs. It's not a consolidation. It's just an investment in startups, high-growth, technology-led highly innovative companies, either in the -- largely in the region, but also in some other geographies like U.S. where there's a big innovation hubs there and the idea is to get access to early and creative innovation as well as using Agthia resources and capabilities for marketing, distribution, research and development to enable those start-ups to accelerate their growth journey. So that's on this one. On the amortization change, I think the change has been advised -- positively has been advised by Big 4 because the way they used to treat it was actually anomaly versus the industry and the common practice. I think historically, what used to happen is brands -- acquired brands used to get [indiscernible] on a finite life while the reality after a few years now of acquisition and these plans are quite expandable into new geographies and new markets that continue to deliver growth and profitability. And [indiscernible] value is actually growing, and it seems to be infinite, so we have a lot of benchmarking. We consolidate external parties from the Big 4. It was audited by our external audit, and it looked like the right thing to do. The important thing to keep in mind the business fundamentals are also strong. EBITDA is improving by 100 basis points on both H1 and the quarter, and this is just aligning our practice to the rest of the industry. M&A front, I think in M&A is an integral part of our 2025 strategy, and we continue to look for the right assets in the right geographies at great valuation, when we have something at hand that we can publish, we will announce [indiscernible].

I didn't hear properly on the Agthia Venture. You mentioned the 25%/75%. So Agthia is contributing 25%?

Agthia will contribute 25% over 5 years.

[Operator Instructions] We'll take the next question from the line of Raj Purswani.

2 questions from my side. One was with respect to Abu Auf contingent payment. At the end of last year, it was like AED 85 million, was the contingent payment supposed to be paid later on.

Sorry can you raise your voice a bit. We're not able to hear you very clearly.

Sure. So my question is regarding the contingent payment for Abu Auf. There was AED 85 million that was supposed to be paid and was disclosed in the financial statement at the end of last year. I can see some AED 11.7 million being paid in the first half with respect to contingent payments. Just wanted to confirm was it with respect to Abu Auf and whether this was the full and final payment or the rest is yet to be paid?

I think the acquisition of Abu Auf has been concluded at the end of the last year [indiscernible] Agthia 60% of the [ world ]. The transaction has concluded at the end of last year.

So was there any contingent payments? Like has that been paid full and final? Or there's some outstanding payment yet to be made towards that transition?

I think we will need to check and will ask our team to reach out to you as to what is the answer on this one.

Sure. Sure. No worries. The second one was towards the investment in Saudi for the Protein factory -- facility. Just wanted to check like from first quarter onwards in 2024, what could be the incremental revenues that we can expect coming from this facility. If you can just give us some ballpark number around that.