Agthia Group PJSC (AGTHIA) Earnings Call Transcript & Summary

Hello, everyone. This is Hatem Alaa from EFG Hermes, and good -- thank you for joining us today on Agthia Group's 9-Month 2023 Results, will be hosted by Alan Smith, the Group CEO; and Sherif Elfaham, Group CFO. Alan will provide an update on the progress of Agthia's 5-year strategy, and Sherif will then cover the financial performance during the period, followed by the full year outlook, and we'll then open the floor for Q&A. For your reference, the investor presentation will be available in the Investors section of the company's website at the end of this call. Please note that the contents of this call may contain some forward-looking statements, which should be considered in conjunction with the disclaimer included in the presentation. Alan, please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us today. We've continued to deliver strong and profitable growth in the year-to-date and remain on track to meet our full year guidance. If we look at the results for the 9-month period, group net revenue increased 10.9% year-on-year, most of which came from volume growth. We saw double-digit revenue growth in our snacking, agri and protein segments, excluding FX, and mid-single-digit growth from water. Excluding the impact of currency devaluation in Egypt, revenue growth for the 9-month period was 20.7%. Like-for-like revenue growth, including Abu Auf was 3.5% year-on-year, or 12.6% excluding the currency impact. Our ability to reap synergies across the group and strong cost discipline resulted in an additional 54 million of productivity gains in the 9-month period, and EBITDA margin expansion of 85 basis points. And we strengthened our export-focused resource during the year with new food service volumes in both regional and international markets, underpinning growth in export revenue from Egypt of 33% year-on-year. We also made good progress on leveraging our in-house capabilities to future-proof growth through innovative product launches, for example, new snacking products into new international markets and new premium products in our agri-business to support our participation in ADAFSA's compound feed program. We continue to make good progress on our digital strategy, signing an MOU with Microsoft UAE, which will enable us to identify opportunities for market expansion and commercial success, while accelerating innovation and sustainable business practices through the FMCG value chain. In terms of our sustainability agenda, this year, we've developed our responsible sourcing policy, which aims to integrate responsible procurement across all our suppliers and raw materials. We helped to uplift local communities through a wide-ranging program of CSR initiatives across each of our business segments. And we reduced our CO2 emissions and water usage across the group, while continuing to invest in renewable energy sources. I'll now hand over to Sherif to walk you through our financial performance.

Thank you, Alan. Good afternoon, everyone. Let me first run you through the key headline figures for the first 9 months. Group net revenue increased 10.9% year-on-year to AED 3.3 billion, with 1.8% growth from pricing and 9.1% from volume. Like-for-like revenue growth was positive across all 4 verticals, excluding currency impact, with 3.5% growth at the group level. Adjusting for the adverse impact on revenue of currency devaluation and EGP of around AED 287 million. Group net revenue increased by around 20.7% year-on-year, with like-for-like revenue growth of around 12.6% on a year-on-year basis. Revenue growth was 12.2% in Q3, ahead of the 8.1% achieved for our second quarter, which included some demand phasing from the earlier Ramadan and Eid holidays compared to the prior year. Gross profit margin also showed good growth, up 85 basis points year-on-year for the 9 months to 29.4%. EBITDA growth came in ahead of revenue growth, up 18% year-on-year to around AED 465 million or 30%, excluding the impact of Egyptian pound [ devaluation ]. This was underpinned by strong growth in snacking, water and food and agri profitability, combined with our continued focus on profit protection in Egypt and group-wide efficiency generation. Group EBITDA margin increased 85 basis points year-on-year to 14.2%. Group net profit increased 12.7% year-on-year to around AED 206 million after absorbing an additional AED 39 million of interest costs year-on-year from the higher interest rate environment. We repaid an additional AED 349 million of debt during the third quarter, taking the total repaid amount year to date to around AED 928 million, which supported our Q3 net profit margin increasing by 80 basis points year-on-year. Notably, we were able to achieve this strong growth in net profit notwithstanding still AED 15 million additional commodity cost inflation year-on-year, though we start to see some softening in Q3. More than 70% devaluation in the value of Egyptian pound relative to the dollar and a rising interest rate resulting in additional interest cost of around AED 39 million year-on-year. We also continue to strengthen our balance sheet through good management of working capital and profit to cash conversion and balance sheet deleveraging, as just mentioned, and that resulted in more than doubling the free cash flow delivery in the 9 months to September. On the following slide, we will unpack some of the key performance drivers, starting with the revenue. The 9 months 2023 revenue of AED 3.3 billion increased 10.9% year-on-year, with 9.1% of the growth coming from volume and supported by mix optimization and innovation across the group. Over AED 72 million of the growth of -- in revenue generated this year has come from product innovation across each of our business segments, led by our snacking business unit. On EBITDA. EBITDA growth of 18% year-on-year was well ahead of revenue, reflecting strong growth in snacking, water and food and agri profitability combined with our continued focus on profit protection in Egypt and group-wide efficiency generation, resulting in 85 basis points of margin expansion at the group level after absorbing an adverse impact of AED 48 million from currency devaluation. Group net profit of AED 206 million increased by 12.7% year-on-year despite the higher interest cost and interest rate environment, which impacted our P&L by AED 39 million and the Egyptian pound devaluation impacting us by around AED 26.7 million on the profit. Turning to our balance sheet. We continue to strengthen our balance sheet. Cash on the balance sheet at the end of the 9 months was around AED 0.5 billion. This is both the capital expenditure of around AED 98 million and AED 928 million of debt repaid during the period. Our liquidity is around AED 2.2 billion. Notwithstanding the 6 acquisitions we have undertaken to date, our interest cover remains strong, close to 7x. Our leverage is well managed with significant further capacity. Our net debt-to-EBITDA ratio now stood at 1.4x, down from 2.3x at the end of December, and that's well ahead the targeted average of 1.5x. Our debt is dollar and [ EED ] dominated, and we continue to achieve favorable borrowing terms from our supportive network of lending banks and effective way of managing the interest rate environment. Moving on to segmental analysis in line with our strategy to expand into high-growth segments in large scalable markets. Revenue contribution from our consumer business division stood at 73% of the group total, with 49% of revenue from outside the [ UAE ]. Revenue growth from our snacking segment was 46% year-on-year with like-for-like growth of 8%. Decline in the volume growth from our protein and frozen segment was driven by the Egyptian pound devaluation with 19.4% growth year-on-year, excluding the currency impact. Double-digit growth from our agri-business with mid-single-digit growth in water and food. Starting with the snacking segment. Reported revenue of around AED 873 million was up 46% year-on-year. Like-for-like revenue growth was 8%, including [ Abu Auf ] from prior period. We delivered strong performance in our dates business as product and packaging innovation across mid and high value ranges and growth in dates variety, combined with the premiumization shift and the consumer demand to drive a strong value growth across retail channels in the UAE and international. Outside of dates, revenue contribution for the 9 months period from BMB and Abu Auf collectively was around AED 400 million, with the former seeing stronger growth in the core markets and higher ingredients in Q3 and continued volume and value gains in premium-branded coffee in Abu Auf in Egypt, resulting in around 86% increase in Q3, local currency revenue, or a 7.5% increase in Dirham terms. Reported EBITDA of around AED 174 million was up 73% year-on-year. The EBITDA growth was ahead of revenue with margin expansion of around 310 basis points, reflecting the positive price and mix effect in both domestic and international dates market, strong growth in Auf's market-leading premium coffee and a step-up in profitability from BMB post-operational restructuring in Saudi last year. Like-for-like EBITDA, including Abu Auf in the prior comparable period, increased 13.8% year-on-year, with like-for-like EBITDA margin around 100 basis points year on year. In our protein vertical, reported revenue of AED 766 million was down 13% year-on-year after absorbing Egyptian pound devaluation impact of around AED 287 million. Excluding the ForEx impact, revenue growth rate has been around 19.4%. Q3 local currency revenue growth of around 16.2% year-on-year was slightly below the second quarter, reflecting a more promotional pricing environment and some consumer substitution between fresh and frozen poultry in Egypt as well as more price-sensitive and competitive back-drop in our Jordanian operations. Reported EBITDA came in at AED 109 million, excluding the impact of EGP devaluation, EBITDA growth of 17% year-on-year was achieved despite significant [ input ] cost inflation in Egypt. Reported EBITDA margin decreased 104 basis points year-on-year, but increased [ 107 ] basis points in local currency basis. Moving on to our water and foods business. Revenue was up 7% year-on-year at around AED 759 million led by positive growth in both UAE. UAE revenue, excluding dairy, was up around 3%, with Al Ain bottled water retaining its market leadership position and internationally revenue increased by 22.1% with notable performance from Saudi, where our revenue was up more than 22%, Kuwait up 27.6% and Turkey 36.8%. Strong EBITDA growth of 27% year-on-year, nearly 4x that of revenue with EBITDA margin improving by 280 basis points. That was driven by a combination of favorable mix, further cost efficiencies in UAE and Saudi, a more benign commodity environment. Notable performance came from UAE bottled water, with EBITDA at 19.1% year-on-year, home and office delivery plus 16.1%, Saudi higher than 100 basis points post restructuring last year and Oman plus 55.3%. Finally, looking at our agri-business, which includes flour and animal feed, we delivered 15% year-on-year revenue growth, largely volume-driven, with share gain in flour underpinned by growing proportion of premium and specialty products, and strong volume growth in feed reflecting good open market execution, participation in ADAFSA compound feed program and related new product development. On profitability, EBITDA was up 17% year-on-year, slightly ahead of revenue, underpinned by good execution in feed across commercial farms and the open market as well as cost efficiency in flour and more favorable commodity backdrop. Before closing remarks, it's worth reaffirming our financial guidance for 2023. This full year revenue growth anticipated between 10% to 12%, an increase in EBITDA margin between 40 to 60 basis points and an increase in group net profit margin between 30 to 50 basis points. Within this guidance, we assume no further acquisitions are made during the year, an Egyptian pound to the U.S. dollar exchange rate of 30.7%, a 3-month LIBOR rate of 4.96% and no significant deterioration in the geopolitical outlook. I will hand back to Alan for closing remarks before we open the line for Q&A.

Thanks, Sherif. So this was another strong and profitable quarter for Agthia, accompanied by continued investments in capability to future-proof our growth. Our year-to-date performance despite the inflationary headwinds and currency volatility, it's a testament not only to our strategy of acquiring, integrating and growing attractive businesses in value-add categories, but also to the efforts of each of our colleagues across the group. I'm pleased to see good progress across our sustainability agenda, not only through the wide-ranging initiatives and specific investment we are undertaking, but also through our robust approach to governance and success in generating a one-voice culture on sustainability. I look forward to continuing to share Agthia's progress with you as we continue our journey to become a regional F&B leader. Thank you for listening, and I'd now like to open the discussion to Q&A.

[Operator Instructions] First question from Karim Abbas. After a period of reducing inflation, do you see a return to inflation in any categories in October? We've seen some comments that chicken had a price spike in October. He has a few other questions, but I'll take them one by one.

So I think what we're seeing in -- we saw -- so if you look on our year-to-date basis, we're still seeing some cost impression versus prior year. But if you take Q3 in isolation, we see an easing of commodity costs. What we can say is if you look at our group financials, obviously, the bulk of our revenue growth is being driven by volume, which we're very encouraged by. So consumption is up, and that's a good sign across the business. It's also a testament to the diversity of the business we have. In terms of the growth, roughly 2% comes from pricing. But when we say pricing, even within that pricing number, a significant proportion is actually driven by mix. So we've improved our -- the sales of our snacks portfolio. Even in our bottled water section, we're seeing an improvement in our higher value products, our sustainable products, our glass bottle, our HOD. And the last thing is our innovation. Each innovation we bring to market, we bring it to market at an accretive margin to the rest of the business. So in terms of inflationary pressure, we haven't seen any significant pricing in Q3. At this point in time, we don't expect that trend to change. And look, we're encouraged by the robust volume growth in the business.

Okay. I'll ask a second question. Have you seen a net positive or negative impact from the boycott efforts across the region? I believe you had previously disclosed that McDonald's is a client of yours in the protein business.

So on our overall business as we look at -- obviously, there's some disruption. We have to do a risk assessment across the business in terms of managing not just our finished product demand, but also our supply chain. So we've seen some slight spikes in freight rates. We've seen some slight spikes in commodity costs, but no major shift at this point in time. There's been some disruption across channels as suggested. But on the other side, we're seeing increasing demand in other channels as well. Look, one of the things you always say about the food and beverage business is we have to keep consuming food. We have to keep consuming water. Our job is to make sure that we make our products available in all channels. That's one of the strengths that we have across the portfolio. And we're not relying to it. The diverse business base that we have across categories and across markets and across channels gives us the ability to flex in different directions. So small disruptions in the short term, and we obviously need to keep an eye on what's going on across the markets.

Okay. Perfect. Some questions on Egypt from Karim and from [indiscernible] together. They're linked. The questions are, what is the contribution of Egypt in terms of sales and EBITDA for the 9 months period? And going forward, what percentage of the business will be still exposed to the EGP, meaning these exclude exports out of Egypt, pure EGP business? And on Egypt as well in the protein business, were there any price increases implemented to offset EGP devaluation? And how do you plan to mitigate further EGP devaluation?

Thank you for the question. So let me take this one. I think it's important to understand that on a 9 months' basis, our total Egypt exposure is around 18% of revenues. Our strategy in Egypt is to turn Egypt to an export hub and that will naturally help us mitigate the currency devaluation impact. We embarked on this journey. We have a dedicated export management team now in place. We have managed to increase our exports from Egypt in the first 9 months by around 33%, which is very, very encouraging results. We now exported AED 55 million out of Egypt in the first 9 months. And that's across the board. So we export dates out of Egypt to export some of our products. We continue to export frozen fruit and frozen vegetable. We also started in the chicken and protein segment as well. So that strategy is progressing well, and we will continue to double down on this one. As far as price increases are concerned, yes, of course, we have taken price increases earlier in the year at the early days of the currency devaluation. I think on a YTD basis, our protein business, the cash increase is around 55%, 56%. Part of that is, of course, carry forward, and most of it happened in the first 3 to 4 months of the year. After that, the currency stabilized and the [ input ] cost stabilized. So we haven't taken further price increases. Positively -- we have been surprised positively by the elasticity of our -- of the demand of our products in Egypt. The drop in volume was better than what we expected. We benefited from multi-tier portfolio we have in protein. The Tier 1 products like Atyab, Tier 2 product like Shiketita and Tier 3 like Meatland. And that helps us manage the price back architecture and dial up and down when the consumer up trade or down trade. On top of that, we dialed up our efficiency programs in Egypt. So we targeted 80 million Egyptian pounds of additional efficiency across our operations. And we have delivered a large part of that. We are on track to deliver [indiscernible] our plans for the whole year. That helped us prioritize protecting profitability and managing the year quite well for us in Egypt.

[Operator Instructions] We have a question from the line of [ Asjad ] Hussain. Asjad, your line is open. Please unmute yourself. Asjad, please unmute yourself. Asjad, please go ahead. We can't hear you.

I have a couple of questions. First, my question is pertaining to the protein segment. If you can kindly give some guidance on how much of the total revenue within the protein segment is being derived from the exports? And like because my understanding is the proportion of the revenue, which is being derived from exports, it's predominantly immune to the currency devaluation, and like how this number is expected to evolve in the future?

So in Egypt, out of the -- if you talk about the protein business only, out of the AED 55 million we have exported from Egypt, around AED 43 million, AED 44 million in the 9 months has come from the protein business unit. That's as far as Egypt protein is concerned. If you talk about total protein, around 45%, 50% of Nabil Foods is also exported, that's coming out of Jordan.

On the Jordanian export operations, I have the second question basically. What I understand is they are exposed to high import duties, the revenues that are being derived from Jordanian exports. So once the localized facility is operational in KSA in the first quarter '24, so how is that expected to impact the overall revenues for the protein segment? If you can give some comment on that?

So if you -- we announced earlier this year our plan to build the new facility in Jeddah in Saudi Arabia. We're pleased to announce that that project is on track, should come on stream in the first quarter Construction is pretty well advanced, and we're starting to install the equipment as we speak. Yes, you're correct. We've seen some pressures on importation into Saudi. We do realize that it indicates our decision to invest in the Kingdom. And we expect our revenues to pick up again in the -- probably in the second quarter next year as the plant really comes up to full capacity. We have very strong relationships with our customers in Saudi, obviously, making locally and avoiding some of the high import -- higher import duties that we've seen over the last 12 to 18 months will definitely benefit business moving forward.

[Operator Instructions] Okay. We have a couple of questions from [ Salvatore ]. Could you shed some light on why protein revenue declined? And do you see a softening -- weakening demand for your protein snack products in Egypt?

Revenue declined primarily because of the EGP devaluation. So if you look at the impact of protein business in Egypt, it's primarily sold into retail with the exception of the AED 43 million that we export. So whilst that was stable, obviously, the significant devaluation in the currency from an average of around 17.5% last year to over 30% this year has impacted that business. In like-for-like terms, the revenue is growing around 27% in Egypt. So in local currency terms, we're in pretty good shape. I think in terms of demand, given the protein is a staple of the Egyptian diet, what we've seen is overall, the category from a volume perspective has come under pressure as consumers will have to look at alternative sources of protein because of affordability. The good thing that Sherif mentioned is the elasticity has been less than we expected. So we have seen, and we saw this back in 2016, with the devaluation back in 2016, short term, you expect to see volume impacts. And then as the business stabilizes, you start to see the consumption coming back over time. And as you say, the volume decline has been less than we anticipated, and we're starting to see some encouraging numbers coming through in the month-on-month sales.

We have a few more questions from Karim Abbas. Has there been any progress on more acquisitions? And could you please give us an update on your efforts to tackle your exposure to single-use plastics?

Okay. So from an M&A perspective, I mean, if you look at our balance sheet, we're in a very strong position. As Sherif mentioned, we paid off something like AED 900 million of debt this year. On net debt-to-EBITDA is now at 1.4x. We have AED 500 million on the balance sheet, cash on the balance sheet. So we're in a pretty strong position financially. And as we said to all of you in the past, we do have approval from the Board to go up to 4x. Now we continue to look at opportunities across the portfolio on M&A as per our strategy. Obviously, if there is a good target out there, then how we finance that will be considered at the appropriate time. So we continue to evaluate those options. So strategy remains the same as we've communicated for the last 3 years. We're not waivering for that. Obviously, what you're seeing in the results is starting to accelerate the organic performance of the business. So fundamentally, we're pretty happy with the underlying financials and volume growth that we're seeing. On the question of water, I think if you look at in detail our Q3 results, you'll see some very encouraging P&L indicators on our water business. And that's driven across the portfolio. That's driven in UAE. It's driven in our both our bottled water and our HOD business. We're seeing improved mix with our shift in our launches of our more premium sustainable products, picking up significant traction in terms of growth rates this year. Our glass bottle has grown around 70% year-to-date. The market looks for more sustainable, friendly businesses. We continue to work on our sustainability agenda, whether that's through our partnerships with Veolia and the Recapp, which is the recycling of PET here. As I said, we're using the rPET in the business, and we still have that long-term commitment that once the rPET recycling facility is set up within the UAE, that we have an offtake agreement. So in terms of our overall water performance, we're pretty happy. Other markets, export markets continue to grow, profit up across the board. It's really -- we're really pleased to see volume consumption, volume increase of around 4% in UAE, net revenue increase in water around 7% to 8%. So the business is really on a solid footing this quarter. And you can see in the net profit expansion in our water and food business, it's a super strong performance year-to-date.

Thank you. We have a question from the line of [indiscernible]. Please unmute yourself.

I want to ask regarding the Abu Dhabi Agriculture and Food Safety Authority, majority of sales going there. That's the first one...

Sorry, we couldn't hear you the first bit. Can you repeat the question please?

Okay. Perfect. So the first question is regarding your agri-business. If there are any one-offs related to any one-off orders from the Abu Dhabi Agriculture and Food Safety Authority? That's the first one. And the second one is just a follow-up regarding the water business. There has been an improvement like you've said. And I just want to understand the market in the UAE and Saudi. And so there is a lot of competition, especially from Dubai. So I just want to understand how did that change? And in terms of Saudi, is it the opening up of Jeddah, if you could just highlight what you're doing there?

Thank you for the question. I think as you point out, Sara, if we look at our agri-business, firstly, our flour business is doing exceptionally well. So it's having a really good year. Good volume growth, good margin expansion, and that's coming from the premiumization we have in the portfolio. So we have the luxury of being quite high in terms of capacity utilization. So we get to choose which business we pursue. So the flour business, the fundamentals are very good. The agri-business has seen strong volume growth in Q3 this year. And that is largely down to the new ADAFSA Feed program, which is a long-term contract, which we've signed, of which we have a certain volume per month that is tied into that business. So it's not a one-off, it's sustainable. It's ongoing. It's a full year contract. And it reflects some of the changes in the subsidy program across the board in the market. If we take a step across into the water business, I think, yes, UAE, and this has been a long point of discussion for the last few years. The UAE water business is competitive, has been for a number of years. As per our stated strategy, we've always communicated that whilst we will continue to protect our market share and our leadership position, we would look to premiumize our portfolio. We would look to drive our HOD business, which is much higher in terms of margin. Our HOD businesses are our home delivery or our 5-gallon business. And we continue to not only sell 5 gallons to homes, but we've now started to expand that to our full Agthia portfolio. So we're leveraging that direct-to-consumer business to strengthen. So water will continue to be competitive. Fundamental demand is up this year. So the category is growing. We are retaining market share overall. Our foodservice business is doing spectacularly well. And that is a combination of, obviously, strength in the UAE economy, plus also the portfolio that we're now able to offer our foodservice and hotel customers, which is benefiting this. The last question you had was on Saudi Arabia. Saudi Arabia, we're relatively small in Saudi Arabia in terms of the size of our business. We only really operate in the Jeddah region. I think we undertook a significant restructuring of that business last year, where we said that we would take out a lot of excess cost in the business to make it sustainable at a certain revenue level. All of the upside that we then get on that volume translates through to the bottom line. So we're seeing around 20% revenue growth in Saudi Arabia. So whilst we're coming off the back of a tough year last year, we're translating that into upside and profitability moving forward. And the revenue growth is continuing to be there. We've got some clear strategies on how we can do more. But I have to say in Saudi Arabia, we have relatively low market share. So we're less concerned about the competitive environment and more concerned about our ability to continue to execute in the market and grow.

Question from Harry [ Welton ]. The first question is, how much of the date revenue is retail versus wholesale? And which are the biggest retail and wholesale markets, respectively?

So our dates business is doing very well this year. I think some interesting dynamics in the dates market. Temperatures in the UAE were slightly lower this year. So the date season was slightly later, probably 2 to 3 weeks later than usual. In spite of that, we had a very strong September. I think what we're seeing is, if you look at our innovation pipeline, the products that we've been launching this year, there is a lot that we've been doing in terms of the varieties that we sell. We've been premiumizing in terms of chocolate and robe dates, gifting packs, really trying to move the needle on that contribution of bulk versus retail dates. So a significant step-up, which is helping the overall profitability discussion. In terms of geographies, we continue to push our geographic growth globally. We've been in the process here in quarter 3 of signing contracts for the season both in Europe and in the United States. We have 26% growth year-to-date in India, which is one of our biggest markets, and that's all focused behind retail. Indonesia, Brazil and our European business cumulatively is up around 125%. We've expanded our product range. And not only are we selling new UAE dates, we continue to look for sources beyond the UAE, and we're seeing strong growth in Medjool and Deglet Noor as we source that from across the region. So overall, our dates pillar in the business continues to be extremely important. And yes, we hope to see more in Q4. Now we've got the full harvest under our belt.

We have follow-up questions from [indiscernible]. Given that -- okay, acquisitions. So the other question is there is a significant improvement in working capital in the quarter, what's the reason behind that?

So we made a significant improvement in working capital. You see [ working capital ] as a percentage of revenue going down from around 14%, 14.5% for the same period last year to 10% as of the end of September. A couple of years back, this percentage was more than 30% down 34%. So we made a significant improvement in working capital over the last couple of years, and we continue to drive that one. This comes through a combination of better negotiation in terms of our suppliers, introducing a vendor financing program without -- there's no cost to Agthia, leveraging our banking relationships, optimizing our stock levels and lead times as well as better control on our betters and collection in the same way. . We see a very strong improvement, and you see that manifested in the significant step up in that free cash flow to firm. That was more than doubled versus the same period last year. More than 700 million of free cash flow has been delivered in the 9 months. We will continue to drive that even harder in the year to go and in the next year.