Agthia Group PJSC (AGTHIA) Earnings Call Transcript & Summary

Good morning and good afternoon, everyone. This is Omar Maher from EFG Hermes. On behalf of my colleague, Hatem Alaa, I would like to welcome you all to Agthia's 1Q '24 Results Call. As usual, the call will begin with a discussion of the key highlights of the quarter, and this will be followed by a Q&A session. And I will now hand the call over to Tatiana Vlasova, Investor Relations Director. Thank you.

Hello, everyone. Thank you for joining us today on Agthia Group First Quarter 2024 Results, 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 will open the call for the Q&A session then. For you reference, the investor presentation will be available at 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 data included in the presentation. Over to you, Alan.

Thanks, Tatiana. Good afternoon, everyone. Thanks for joining us today. I'm pleased to announce that we delivered strong growth and a notable increase in profitability in Q1 of 2024. We continue to make good progress across our 3 strategic pillars of growth, efficiency and capability. Our group net revenue increased 22.6% year-on-year, most of which came from volume growth. We saw double-digit revenue growth in our Snacking, Agri and Protein segments whilst Water & Food showed modest single-digit growth. Notably a one-off weak trading activity contributed AED 120 million to our revenue in Q1. Excluding this one-off, our revenues still grew an impressive 12.4%. Through efficient synergies across the group and stringent cost management, we realized productivity gains of AED 29 million during the first quarter of 2024. We remain committed to developing innovative products and digitalizing our operations. In Q1, we generated approximately AED 48 million from innovations. Furthermore, 3.4% of our revenue, excluding that one-off trading sale, now originates from our digital e-commerce channels. Despite the economic challenges, our EBITDA margin improved by 10 basis points. Sherif will provide much more detail later on. Our Water business in Saudi Arabia continues to thrive following its turnaround, with EBITDA expansion by 9% in Q1, and we continue to strengthen our strategic export capabilities in Egypt, resulting in export revenue of AED 24.4 million in the first quarter. We've also made good progress in expanding our in-house capabilities to secure future growth. And on that, firstly, I'd like to brief you on the recent changes within our leadership team. In the first quarter, we bolstered that team with the appointment of Rafik Lawendy as our new Chief Growth Officer. Rafik brings over 20 years marketing, strategic and operational experience across a range of consumer-facing businesses. Collaborating with our leadership team, Rafik will lead the development of Agthia's long-term growth strategy. Additionally, I'm pleased to welcome Hala Katounas as our new Senior Vice President of M&A. With over 2 decades of investment experience across the MENA region, plus Europe and Asia, Hala brings invaluable insights and expertise to our leadership team. Moving on to more specific on capabilities. Our efforts in product innovation continue to bear fruit. In Snacking, we introduced our new organic Date Crown range, Abu Auf instant coffee and a diverse Ramadan gifting range. Additionally, we've developed various products and packaging innovations across the quarter. Our Nabil brand launched a new range of chicken strips, while Al Ain food in the UAE unveiled frozen products, including nuggets and new pizza and pasta source varieties. Our Agri-Business also responded to customer needs by introducing 2 new types of flour as well as Agrivita Dairy Premix, which should help farmers to improve animal nutrition. We have continued to make good progress on our 5-year strategic digital transformation journey. Our Agrivita application for farmers has embarked on its journey to become a true farmers' marketplace, offering relevant products and services, with our first partner being Sherwood. Moreover, in the first quarter, we started transforming safety and health of our employees through technology by rolling out a safety AI image recognition solution to alert and report on potential safety well-being before they happen. We've also expanded our digital experience and data analytics team and started some AI machine learning cases across the business. We've also started to use Microsoft Copilot across the organization to further empower and equip our workforce via the use of additional tools to enhance agility. Our commitment to sustainability remains steadfast. This quarter, our Board approved Agthia's new ESG policy, defining 4 strategic pillars: environmental integrity; scaling health and wellness; fostering positive potential; and shared accountability. As we maintain our commitment to executing our ESG strategy, I'm pleased to highlight some achievements from the previous quarter: a notable 7% reduction in group CO2 emissions year-on-year; and the attainment of a 96% level of recyclability or reusability for our group packaging. I'll now hand you over to Sherif to walk you through the financial performance.

Thank you, Alan. Good afternoon, good morning, everyone. Let me take you through the financial performance. As Alan mentioned, we had a very strong quarter 1 across the board. We have achieved reported growth of around 23%. If you strip out the one-off trading transaction, this becomes around, 12.4%, still ahead of timing on the -- of our guidance linked for the year, 10% to 12%. EBITDA had a very strong growth as well, driven by mix improvements, innovation and optimization. 23% growth in EBITDA and 10 basis points. Group net profits has outpaced EBITDA growth at 32%, improving the profit margin to 8.8% or 63 basis points, again, at the high end of the guidance range of 30 to 50 basis points. The business environment remains volatile. We have seen a further devaluation in the Egyptian pound in the back end of quarter 1. The impact on that in the quarter was around 19% devaluation, around AED 42.5 million on top line, around AED 10.2 million on EBITDA and AED 6.5 million bottom line. Yet our strategy in transforming Egypt into an export hub is working very well for us. We have achieved very strong results out of Egypt in foreign currency this quarter. We'll take through subsequently. We continue to see elevated interest rate environment year-on-year. And we continue to manage it proactively and effectively through a mix of hedges and cash optimization. We also have seen a significant step up in earning per share. That grew 33% for the first quarter. We continue to optimize our working capital and drive efficiency out of that. Working capital now stands at 8.4% of revenue at the end of quarter 1 compared with around 16% on the same period last year. We had strong free cash flow [ revenue ] of AED 88 million compared with a much higher cash flow in the previous quarter. That is largely due to some phasing and some tactical forward coverage in stocks that we have taken in quarter 1 to get some benefit in terms of pricing commodity cost in areas like cocoa and coffee as well as to be more proactively able to deal with the geopolitical situation in the market. If you move to the next step -- next slide, again, you see the fundamental improvement continue in cash conversion cycle, which is dropping from 77 days to 37 days across the board. We run a very strong program to squeeze cash out of the business, renegotiating credit terms with suppliers and reducing competitive supplier finances at our own preferential rates, working collaboratively with our sales and distribution team, optimizing the debtors at collection and overdues as well as revising our stock coverage policies and optimizing the stock levels as well. There is a bit of a busy comparison that's playing out in the cash figure, if you see it on the right-hand side of the slide, because our working capital continued to improve significantly over the quarters coming from a very high level at the end of 2022 and quarter 1 2023 of AED 830 million down to AED 750 million. Now it's hovering around AED 487 million, which is way below the AED 750 million, AED 800 million. However, this end of quarter 1 '24 is compared by a much lower number, which is end of year last year, while the same period last year is compared with a much higher number, and therefore, show an improvement. This is a transitional impact on the way cash is calculated. It does not worry us in terms of delivering the full year cash number. If you move to the next slide, we continue to strengthen our balance sheet. We have a very strong balance sheet. We optimize debt. Net debt to EBITDA now is at 1.3x, which is a very competitive ratio. Interest coverage is more than 8x. We have a strong borrowing capacity, close to AED 2 billion additionally, if required. We also have cash in the business up to AED 500 million as well as our average dividend yield, cash dividend yield of 4.5% basis on the average price for quarter 1. If you look at the segment performance, we're very pleased to see all business units and segments are growing in the first quarter of 2024. Most notably, Protein & Frozen coming back to growth on -- in dirham terms for the first time since Q3 2022. And we're happy to see strong growth across the board. That was led by the Agri-Business. Within that, that there is a one-off trading transaction of AED 120 million. Snacking had a very strong performance on the back of coffee and dates, contributing AED 67 million. Protein & Frozen, as I said, back to growth, AED 40 million as well as Water & Food adding AED 9 million to the top line. If you look at EBITDA again, EBITDA improvement across all business units, notably led by Snacking business, driving AED 33 million; followed by Agri-Business, AED 21 million; then Water & Food as well as Protein are also contributing AED 10 million combined. There are some investment in capabilities and marketing and digital that we have taken centrally to continue to strengthen the organization capability for the future. Same picture on net profit margin. Even after absorbing the newly introduced UAE corporate tax law, we've been able to improve profitability across the board. All business units have contributed very strongly. Snacking and Agri are leading the back, AED 15 million, AED 16 million each; another AED 10 million coming from Water & Protein; and then offset by the central capability investment that I explained earlier. We continue to transform our portfolio and our business. If you look at Agthia, where we are today versus where we were 3 years back, we have 57% of the business in UAE versus a place where we started our strategy that was almost 95% or more of the business coming from UAE. We have now other Arab countries represent 22%; that's mainly Egypt and Jordan. And GCC excluding UAE, 12%; and rest of the world, as we continue to expand our export operation, is close to 10% of the business. The business unit with the category food brand is on the right-hand side. You see Snacking is leading the back at 31%. That's a future growth priority category for us, followed by Agri, 31%. This is slightly inflated by the one-off transaction in quarter 1. And then you have our Protein & Frozen representing 20% and Water & Food, around 18%. So a well-diversified portfolio, quite balanced, and that helps us navigate opportunities better and deal with challenges in a much more effective way. If you look at the individual business unit performance, Snacking is leading the pack in terms of growth, growing 18% in dirham terms and improving EBITDA significantly at 430 basis points and growing the absolute EBITDA at 43%. The strong growth came largely from coffee and dates across the board. Abu Auf business continue to do very well in Egypt, opening 27 new stores in quarter 1 and delivering very, very strong growth in dirham terms. Al Foah continue to perform strongly and continue to premiumize and innovate in the dates category as well as opening and doubling down on white spaces in areas like India, Indonesia, Brazil, Europe and were also venturing into U.S. If you move to Protein & Frozen, as I said, we are very happy to see Protein & Frozen coming back to growth, in dirham terms, 16% for the first time since Q3 2022 and growing EBITDA by 10% in spite of the volatile commodity prices in the raw chicken that we have seen in Egypt in Q1. The growth was largely driven by robust prices and favorable tax as well as introduction of some innovation like the premium range in Jordan, and that helps us deliver a very strong quarter in Q1. If you move to Water & Food, the total category has delivered 3%. But within that, our Water business is growing at [ 6.5% ], which is very healthy. And that's largely driven by innovation like a glass water as well as the home and office service sector who's performing very well, together with bottled water in UAE and GCC. We have deprioritized some of the low-margin food item within that. That resulted into slightly lower growth for the total business unit. However, we prioritized profitability improvement, and we delivered more than 200 basis points of profit improvement, landing an EBITDA of 16.5% in our Water & Food business. Agri-Business on the face of it has grown 51%. If you strip out the one-off trading transaction of AED 120 million, the growth is around 10.5%, equally driven by both Flour & Feed, very strong execution in the market. We introduced new formats in terms of improved animal nutrition feeds and specialty flour for our Asian consumer, and we continue to drive margin improvement and EBITDA margin improvement by around 50 basis points in that business unit. Egypt, speaking of which, as I said, our strategy in Egypt has been improved. Our strategy is to turn around Egypt to an export hub, leveraging its low-cost infrastructure, geographical location and strong trade ties with other countries. We have exported around AED 70 million last year out of Egypt. This year, we are targeting AED 100 million. Q1 was very strong at AED 24.4 million across the board. We export our frozen foods, frozen vegetable. We also export dates [ round the world ], and we started to export some of our chicken ranges. We also executed very well in the local market, thanks to the strength of our local brands, Abu Auf and Atyab. As a result, we delivered 39% growth in dirham terms in our Egypt operation and improved EBITDA margin by 230 basis points to 18.2%. So we're turning around Egypt from a challenge to a comparative advantage for us as a group, and we continue to double down on this strategy. Innovation was a very strong contributor to our growth in the first quarter. AED 48 million came from innovation across the board. That's almost 35% of our growth in the first quarter driven by innovation. You see some of our innovation across categories, the Ramadan activation and the premium gifting range in Snacking. And also, you see the instant coffee jar that we started in Q1. Protein & Frozen, you see in Jordan, we launched a new range of chicken strips. And in UAE, we have several new Al Ain-brand products. Even in Agri, we introduced new specialty types of flour to meet consumer needs and we introduced new Agrivita Dairy Premix as well. So innovation is a very important part of our growth journey that we keep driving. With that, we're happy to reconfirm our confidence in delivering the full year guidance for 2024, which is: a revenue growth of 10% to 12%; EBITDA margin improvement between 40 to 60 basis points; and net profit margin of around 30 to 50 basis points. That is, of course, assuming no significant deterioration in the geopolitical outlook. So far, the business has been resilient, and we demonstrated that we can navigate the environment quite well and still deliver on our outcome. With that, let me hand over back to Alan to wrap up the earnings slides. Alan, back to you.

Thanks, Sherif. So our strong performance in the first quarter really underscores our resilience and strategic agility in navigating challenges and capitalizing on opportunities. And that's despite economic headwinds. Our results reflect positive growth across all segments, which is a testament to the dedication and expertise of the team. Our commitment to innovation remains unwavering, and this is allowing us to capitalize on synergies across our segments, introduce new innovative products and explore promising export markets. This strategic agility enhances our competitive edge and positions us for continued growth and success. At the same time, we're making notable progress towards our ESG goals. With focused initiatives and a strong emphasis on corporate governance and sustainability culture, we're steadily moving closer to our objectives. As we continue our journey towards leadership in the regional food and beverage industry, Agthia remains steadfast in delivering value to our stakeholders. Our dedication to transparency and ongoing improvement underscores our commitment to achieving our strategic KPIs and driving sustainable growth. Thanks, everyone, for listening. I'd like to now open for the Q&A discussion.

Thank you for the presentation. [Operator Instructions] And the first question is from [ Deepan Shirsvi ]. Looks like there is a problem. [Technical Difficulty] Meanwhile, we'll take another question from [ Ahmed Al-Adolit ]. He's asking how much of the AED 120 million trading one-off came into EBITDA this quarter?

Okay. So the trading, let me take that question. So the trading activities are largely very nominal in terms of margin and profitability. So there's around AED 1 million that came out of that. So largely negligible. And that's why we execute them because they're really one-off in nature and it's not a [ full ] business. It's a typical transaction in some of the commodity heavy businesses like Agri, between companies in the market that they exchange some trading activities to meet some full-term demands.

And next one is from [indiscernible] asking why was the finance cost that low at a mere AED 16.5 million in 1Q '24 versus AED 27 million in 4Q '23 but levels are similar though?

Yes, sure. So this is largely because of the benefit we are receiving from the hedging activities. So we do hedge around 70%, 75% of our interest, and there is a mark-to-market that takes place on a quarterly basis. Mark-to-market was favorable in Q1, and that helps us optimize the overall interest cost in quarter 1. On top of that, of course, as we -- if you look at the way we managed debt over the last 4 quarters, 5 quarters, we significantly reduced debt, and we used most of the cash we generated out of the business to settle debt and reduce the debt burden. So we expect it to go down quarter-on-quarter.

Thank you. We'll try to go back to [ Deepan ] again, see if he's able to ask his question.

Am I audible?

Yes.

Okay. Sorry, I think -- you guys did not hear me last time?

No. But this time, we can hear you loud and clear.

Okay, sure. So I had 2 quick questions. The first one was on the Water segment. So how do you feel the margins stand today? Do you think they have peaked out? Or do you feel there could be some further efficiency gains or pricing its positive impact over there? The second question is on the Egypt segment. So we have seen that in the past, the segment has been a drag on the overall results. So this quarter, you've seen a big turnaround over there. Was this largely pricing driven? And how sustainable this is?

Thank you. Alan, do you want to take the first one?

Yes, I'll take the first one and then you jump in on the Protein side. So thanks for the question. I think overall, pretty happy with the performance of the Water business. If you look across markets, we grew in Q1 by around 7% in terms of top line, but we continue to improve our net profit margin. So notable improvements in the quarter. I think to your question around where do we expect this to go, we continue to focus on doing the right things in the Water business. And you've seen over consistent progress quarter-on-quarter, volumes are relatively solid. We are improving the mix in the business. Obviously, consumers' trend towards more sustainable products is helping us. So our home-office delivery business is going well. It's growing nicely at around 9%. Our bottled -- glass bottled water business, growing nicely at around 50% growth. So across the business, our plant bottles growing, our PET, recycled PET bottles growing. So all of these products are helping to drive our mix and to revenue per liter and also our profitability. So we'll continue to focus on doing the right things. From a cost perspective, costs are okay at the moment. They're not at all-time lows. They're certainly not the highest that they were in 2022. But we believe we have a very robust business proposition now in Water, and we continue to focus on doing the right things. Sherif, over to you on Protein.

Thank you, Alan. So yes, we took some pricing, of course, in Egypt. That is why. By category and by product, between average 20%, 25%. And we have seen some volume growth as well, albeit small volume growth. We have the most volume in the quarter and quarter 1. We have seen a volume growth around 2% on average. This is between our Protein and our vegetable foods as well as Abu Auf, as well as across Egypt. So that's a very positive change. We haven't seen a volume drop. I mean we continue to maintain market leadership in the brands and categories we operate in. We think the changes and the turnaround that we have seen in Egypt is sustainable for a couple of reasons. One is as we continue to increase our exports out of Egypt and the export share out of our total sales, that gives us natural ammunition against any change in currency, and that helps. Secondly, the positive volume growth is, of course, a good sign for us. And thirdly, the last devaluation has helped a lot to eliminate the parallel market and speculation, and stabilize a lot of the prices in the market. So we're positive about it, and we think that change is sustainable.

Next one is from [ Remil Badi ]. The question says, are there any plans for M&As in the medium term?

I think if you look at our guidance for 2025, we're still guiding to a revenue of AED 6 billion by the end of 2025. And if you look at our guidance organically, it's around 10% to 12%. So in the back of our minds, we are still looking at the right opportunity, potentially a transaction around AED 500 million in terms of revenue. That's the thinking in the guidance anyway. So we continue to develop the pipeline. We're just in the process of refreshing our strategy as well because obviously, Agthia's strategy is now 4 years into a 5-year cycle. So we're looking at how we refresh that. And also, we'll probably bring a little bit more color around the types of markets, which of the categories we intend to focus on over the next few months. So yes, I think M&A is still very much a part of the long-term growth agenda for Agthia, and you should expect to see more of the same.

Thank you. There's another question from [ Deepak ] and the question says, what is driving the Protein segment growth? And how sustainable is it? And what is the growth in local currency terms?

So I think we answered part of that question in the previous price/volume discussion. And we'll build of that couple of our builds and also our new protein facility in Saudi has started production and sales. This month, we invested around AED 87.5 million. This capacity is -- Phase 1 is around 6,500 tons and we started sales already in May. We expect that to generate around AED 40 million additional sales in this year, in the year to go. That would be a plus to our protein operation. Plus, of course, the innovation that we have shared in the innovation slide, which we try to drive a lot of revenue synergy between Atyab and Nabil and try to do cross-utilization of portfolio across market.

[Operator Instructions] So we have a question from [ Harry Welton ].

Can you hear me okay?

Yes.

The first question was just related to Protein & Frozen margins, I think, which has been impacted by the devaluation. Could you just comment on like what the expectations are for that? Do you expect to get margins back up to sort of levels seen last year? Or should we expect there to be continued pressure on the Protein & Frozen margins?

Yes, sure. So I think what we have seen in early Q1 was a lot of speculation on the -- in the parallel market before devaluation. And that led to a spike in the raw chicken prices in Egypt closer to EGP 95 to EGP 100 per kg, which we have never seen before. We have taken some price increases, of course, but that was below this level. And we know these levels are temporary or transitory. Once the devaluation has been announced, over the following weeks, the price has come back to normal level. So it's now EGP 78, EGP 79, so below EGP 80 basically. And we're pricing way ahead of that. So we see margin recovery happening in Q2.