Agthia Group PJSC (AGTHIA) Earnings Call Transcript & Summary

Hello, everyone. Welcome to Agthia's First Half 2024 Results Earnings Call hosted by CI Capital. I'm [Dueni], Sector Head of GCC Consumer, and I have the distinct pleasure of introducing Agthia's management team. From the company side, we have with us on the line Alan Smith, Chief Executive Officer; Sherif Elfaham, Chief Financial Officer; Tatiana Vlasova, IR Director; and finally, Amr Amin, Senior IR Manager. Following the presentation of Agthia 's performance, the floor will then be open to a Q&A session. I now give the floor to Tatiana. Please go ahead.

Hi, everyone. Thank you for joining us today on Agthia Group First Half 2020 Results. Today, Alan will provide an update on the progress of Agthia 5-year strategy, and Sherif will then cover the financial performance during the period, followed by the full year outlook. And will then open the floor for Q&A session. For your reference, the investor presentation will be available at the Investors section of the company website at the end of this call. Please note that the content 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. So, good afternoon, everybody. Hope you're all well. Obviously, if you recall, our strategic vision is to become a regional F&B leader by 2025. If we focus a little bit on those 3 pillars of growth, efficiency and capability. I'll give you an update now on how we're performing against that. So, on growth, reported net revenue for the half year grew 14.7%. Obviously, pleased to see that the volume is driving 11% of that growth and 3.5% came from pricing. So nice mix there in terms of the drivers in the business. If we take just our Egyptian business, then revenue growth, 21.3% year-on-year, excluding the EGP devaluation impact of AED 144.5 million. We have generated over AED 92 million in revenue generated from strategic product innovation. So actually, around 45% of our growth has come from innovation alone. So, it's a good reflection on how we're building the business. Digital revenue reached AED 91 million for the quarter -- for the half year. So, 3.8% of our H1 core sales is coming through our digital platforms. And the last thing is we opened a very important strategic facility, and I'll give you a bit more context on that in a minute, which is our new protein facility, which we formally opened in Jeddah in 2024 in July, but actually came onstream during quarter 2. So, an important landmark to enable our growth for the future. If we look at the efficiency pillar, then our continuous focus on productivity enhancements has allowed our teams to unlock around AED 63 million of savings in the first half of the year. If you look at our specific verticals that protein of frozen delivered 20.5% EBITDA growth in AED terms in spite of that EGP devaluation, so strong performance. And as we always say on our Egyptian businesses, our #1 priority is always to protect profitability, and Sherif will give you a bit more context on that later. UAE bottled water continues to do very well, apart from growing around 8% in revenue, EBITDA expansion of 56.9% or 590 basis points, which is testament to the great work that we've done in that business in terms of focusing on mix, on growth, but also on an operating model that allows us to drive bottom line performance. The recently lodged KSA protein facility has actually been built adjacent to an existing water facility. So again, we'll focus on new assets, investing in CapEx to support growth, but also building them in proximity to one of our existing facilities, which allows us to drive back-office synergies. And then last thing on one of our key strategic pillars around our Egyptian platform, obviously, is exporting to keep that kind of insulation from foreign currency impacts. We drove AED 50.7 million of export revenue from Egypt in H1 2024. That is 53.6%, up on the same -- 53% up on the same period last year. So, great results in terms of that strategic pillar. And then the last thing is capability. We always say in our business that people and the capability side of things are really key to unlocking our financial results. One big addition to my leadership team as the appointment of our CEO, who joined in April. CGO will focus on marketing, on corporate strategy, BU strategies together with the BU leaders, and also building our capabilities around digital in conjunction with the Chief Digital Officer and the business unit. So, very important addition to the team, and we're already starting to see the impact of that new role. In terms of innovation, if we look across the different platforms, snacking, a lot of the innovation was coming from our organic date range, on new organic date range, protein and frozen focused on new premium products under the Nabil brand to try and drive differentiation in the market. Our water business continues to improve its mix. So, our glass bottle business continues to grow. And in addition to that growth, we actually transferred one of our idle production lines from Turkey across to the UAE to support that growth. We have our plant-based portfolio on 100% rPET bottles, which again are growing disproportionately to the base business. So, meeting consumer trends, meeting B2B demands for more sustainable solutions. And then the last thing is our agribusiness continues to perform very strongly. We launched 2 types of specialty flowers. And within the feed business, we knew we launched our new Agrivita Dairy Premix. All of these are designed to continuously premiumize our general offering to the base portfolio. And then if we start to talk about digital road map, you know that we've got a commitment to drive investment behind digital. We've continued to build out our digital and technology team, and we're working with the business units to strengthen there as well. We've actually relaunched our Al Ain Water home delivery app, Al Ain water home delivery business growing very nicely this year. And we're really focused on the customer experience, how we can continually improve that. We're moving significantly in the right direction and our focus is allowing us to continue to see both top line and profit growth in that business. And then the last thing is we're using AI. Obviously, one of the big opportunities and one of the hot topics is how our company is using AI. In this case, we actually launched recognition software across a couple of our factories, designed to try and pick up unsafe behaviors in the factories and send messages to the HSE team, so that they can educate the workforce in terms of how to better understand and recognize when they're not looking after their own interest. So, great development there in terms of leveraging AI. And look, the last thing, obviously, we continue to be focused on ESG. I talked about the growth in our water business in terms of the mix. In ALPIN Turkey, we commissioned our solar energy plant there to support manufacturing, and we've reduced our CO2 emissions across the business by 7.6% year-on-year. So, great progress across all the 3 pillars. I'll hand over to Sherif now to talk to you about the financials. Sherif, let's just cover the protein facility. I think it's good to update the investors on that. So, new protein facility in KSA. As I mentioned, we've opened it in Jeddah. We've invested AED 90 million in the first phase. We have 2 production lines, 1 production line with 2 separate finishing lines. So, we have a capacity around 6,500 to 8,000 tonnes, depending on the SKU mix, and we have the capability to produce around 50 SKUs. The rationale for this is quite clear. KSA is a strategically important market for us. This gives us a much stronger footprint in the market, and obviously, strong local demand and the regional QSR relationships we have today and food service relationships, it's very important for us to be close to our consumption. And as we keep saying to you, protein is one of our key growth pillars for the future and it's great to be able to invest in expanding that network. Over to you, Sherif, for the financials.

Thank you, Alan, and good afternoon and good morning, everyone. We'll take you through the Q1 financials. We're very pleased to deliver a very strong performance across the board for the first half of 2024 with a very strong growth at 14.7%. It has one one-off trading transaction of around AED 120 million in our agri-business. If you exclude that, our growth is very healthy at 9.3%. We keep improving our profitability. That's through a mix of levers, primarily relying on innovation as well as driving efficiency in the business. We improved EBITDA margin by around 65 basis points at the high-end of the full year guidance range, and we are at 15.1% now, growing EBITDA at almost 28% higher than the revenue growth. And we further extended our profitability, improving net profit margin by 100 basis points. Almost 32% growth in spite of the very challenging business environment that we have seen in the first half. We believe that this performance clearly demonstrates the strength of the company and the level of diversity we have geographically and category-wise that helps us advocate the challenges much more effectively. We continue to see volatility in the business environment. We have seen 50% evaluation in the Egyptian bound toward the end of March, which average around 37% for the first half. And we have continued to see a rise in elevated interest rate level at 5.4%. And in spite of these challenges and other geopolitical challenges, we've been able to deliver such a strong performance for the first half. We've also seen a significant step-up in our earnings per share, driven by the profitability growth, 34% improvement in earning ship, and we continue to drive optimization in our working capital as a percentage of sales, that's going down from 17% in the comparative period down to 10%. And if you go a little bit further in 2022, it was even up 20% plus. Same improvement you see in the fundamental of the working capital management in the cash conversion cycle, which is an improvement from 83 days to 45 days. And again, if you go back into '22, that was more than 100 days. So, we keep driving the improvement of support in working capital. And you see clearly in the mid, our working capital level at AED 507 million, which is way lower than the average of '22 and '23, a bit higher than the closing of last year, which was the lowest point. But on a trend-wise, we are continuing to drive improvement. Free cash flow is lower than last year, driven by a couple of items. One is we have overspent in CapEx it in the first half because of the protein facility in Saudi, and we have made some choices for some strategic and transparent to secure big crop in advance and a couple of strategic commodity for us that gives us P&L advantage. So, we consider that a pacing and the docs that have been in the business, while we continue to drive fundamental improvement in the working capital and cash conversion. The balance sheet remained robust and strong. Our net debt-to-EBITDA at 1.6x. We have a very high interest coverage, around 7.7x. We have borrowing capacity up to AED 1.8 billion, we need to an average cash dividend yield of around 3.9%. With the strong performance, the Board has approved the proposal to increase the interim cash dividends by around 25%, distributing 50% of the generated profit over the first half. That will be proposed to the AGM on 12th of September for final Aruba, and it demonstrated the strength of the company performance and robustness of the balance sheet and the cash position of the company. If you look at the top line growth, I think it's pleasing to see all business units are contributing to growth in spite of the various challenges we have seen in the business. This was led by our snacking business driving AED 170 million of incremental revenue. After absorbing its share of Egyptian bond evaluation. Agribusiness was very strong AED 151 million, of which close AED 120 million in one-offs. If you exclude that still growing strongly in spite of softening in the commodity cycle. Equally our protein business contributed to AED 36 million in spite of the challenges in both Egypt and Jordan, and our water and food business contributed AED 20 million to the top line. If you look at the better growth against inverter, all business units are contributing to a better growth led by snacking and agri, variceal adventure to the revenue contribution and followed by water and food and protein business, and spite of the challenges that we have seen. We continue to invest on capabilities in cultural innovation and digitizing organization ability capability centrally to keep fueling the growth engine of the county. If you move to the profitability, pretty similar picture. Again, strong improvement across the board, all business us are contributing, led by snacking and agri, and then followed by water and food, and protein. Net of the investment, we'll be able to grow our profitability, almost 32% in the first half. If you look at our segment performance, we continue to diversify our geographical footprint. UAE business now is around 54% of the portfolio. We have other countries, 23%, and that's largely Egypt and Jordan, GCC, other GCC countries, 14%, and the rest of the volume is 9%. Business is exporting to more than 45 countries globally, and we keep expanding that's fixed. If you look at the business unit footprint, snacking, our future growth category is now 30% of the business, and that also gives us a positive impact on both top line and bottom line, followed by our agri-business around 26% and in water and food, 22% as well as protein and frozen, around 22% of the business. So, a well-diversified portfolio, geographically and category-wise. If we look at the different business unit performance, as I said, snacking was being back almost 20% growth on revenue, driven by beds and coffee, significant improvement in profitability, 30 basis points of improvement in EBITDA margin, which stood at 20.5%, largely driven by innovation across the board. And number off, we have seen very strong growth. We opened 44 new stores in the first half, and the business is continued to demonstrate agility and entrepreneurship and delivering 14% revenue growth. Also, given a lot of envision, which shows you subsequently across the board in terms of instant coffee, protein bar and others. This continues to do fantastically well. As Alan highlighted, we introduced a new organic date range, and we continue to expand our export and premium with deal offering in the date sector. If you look at our protein and frozen, we're pleased to see revenue growing at 7.2% in the round terms in spite of the challenges we have seen in the business, and improving profitability by around 140 basis points and restoring EBITDA margin back to 16%. If you recall in Q1, we had a slightly lower profitability that we prioritize integrity of BNL. We focused on protecting profitability in Egypt. We live pricing in the market and protecting our market leadership position, and that helps us turn around the big share in the second quarter and in the first half. In Jordan, situation continue to be challenging from a QSR service sector. The team find opportunities in catering and food service and export as well. I mean, to reduce new innovation in the premium range in Jordan as well, which helps our performance. If you look at our water and food business, we grew 4% in a highly competitive category. Within that, UAE water grew 8% and maintaining its market leadership position. International business continued to do well, and we will continue to see very promising results on the leasing innovation, be it glass pot or our bet for recycled packaging process. HOS service, also shown very strong growth at almost close to 10%, and we increased our customer base, and that highly profitable segment out of the book. On profitability, the business continued to drive profitability improvement by 190 basis points, and having a very comparative EBITDA margin of 15.3%. If you move to our agri-business, the rewarded growth is around 25.5%. That includes the one-off that happened in quarter 1. If you exclude Delta business managed to deliver 5.2% year-on-year growth and slight of the softening in the global commodity costs, and the fact that we had to adjust our pricing in the market. We held our market-leading positions in both flower and feed, continue to drive a very strong engagement and sales growth through our Agrivita produced improved ranges in both flower and feed as the new innovations. We also have improved profitability by around 106 basis points in the first half. If we talk about Egypt, I think we're very pleased to see Egypt for the first half and the second quarter performing really very well. Our strategy for the Egyptian business was always to turn around the country to export hub, leveraging its low-cost location, geographical proximity and free trade agreements. We've been working on that strategic area now, and it's blaring very nicely to our advantage. So, we exported AED 51 million out of Egypt, which is 50% higher than what we'd been a year back. And we continue to drive market-leading position in the local brands we own in the market. That led to ease of growing at durations, 20.3%, which is accretive to the group and moving volubility by more than 300 basis points in the content as well. So, we're very pleased to see us turning around Egypt from a wide point or a challenge for a group to a combined advantage, and we will continue to double down on that strategy moving forward. If you move to the innovation, these are some of the innovations that was launched across the 4 business units, you see wide range of innovation across the board and snacking, the organic date, instant coffee, protein bars, munching and snacking, premium range in the protein segment, the enhancing flower and feed range in agri. And of course, that glass bottle that comes in still and sparkling, and the arboreta and very cyclic back in water. We're very happy to see innovation over AED 92 million of incremental revenue, around 45% of our growth is coming from innovation, and that doesn't only help us to grow but also help us to improve mix profitability for the group. Well, with that strong performance, we're happy to reconfirm our guidance for the year to grow revenue 10% to 20% with the below CapEx, improving EBITDA margin, 40 to 60 basis points, and improve the profit margin to 50 basis points on the same CapEx we have shared before. With that, let me hand over back to Alan.

Thanks, Sherif. Okay. Thanks. So, in the first half of the year, we continue to drive strong innovative growth. You can see we've expanded our product portfolio and strengthened our market leadership position across all segments. And you can see on the ratio of profitability expansion to revenue expansion, we're certainly making profitability on #1 priority. Now, despite an economic backdrop characterized by inflationary headwinds and currency volatility, we have remained disciplined and agile in our execution. I'm grateful for the continued support and dedication of the whole team across the group, whose efforts have been instrumental in achieving this strong first half business performance. Looking ahead, I'm excited to share Agthia 's continued progress with you as we take the business from strength to strength. Our commitment to growth to innovation, to digitalization and operational excellence remain unwavering, and I'm confident that we'll continue to deliver value to our stakeholders. Thank you all, as always, for listening. And we can now open the floor to Q&A.

Sure. Thanks, management team. Now, we will open the floor to questions. [Operator Instructions]. We have one question in the chat from Sultan Shanan. Sultan is asking about how much will Jeddah, the new facility add to sales and bottom line and margins?

Sherif, do you want to answer that one?

Yes. Sure. So that's a very good question. Thank you for your question. As Alan said, we've just in aggregated the facility, and we expect to see a ramp-up and revenue coming in the second half of the year. We expect an annualized revenue of the Phase 1 of the manufacturing facility, which we aggregated annualized AED 50 million to AED 60 million then to expect half of that to come in the year to go. There is a plan for Phase 2 of the facility that should come for the end of first half next year to add more capacity and help us expand and double down the growth of that -- of the very bouncing sale market. In terms of -- the second question?

Yes. What would be the guidance for 2025 and the medium-term?

So, we're not changing our midterm guidance that we issued early last year. So, we expect the business to be at around AED 6 billion, then by end of next year, of which AED 5.5 billion will come organic and around AED 0.5 billion should come inorganic. And we expect to continue driving profitability as well to improve EBITDA margin up to the 15.5% to 16.5% and a profit margin in the range of 8.5% to 10%, and driving return on invested capital between up to the 9% to 10% percent range. So, no change in the mid-term guidance that was issued.

Thank you. [Operator Instructions]. Yes, we have now a question from Shabir, is asking about Note 19 in Q2 financials. There are other operating expenses. Could you give like a breakdown? What's included? And why has there been a decline in the first half of 2024.

I'll let the IR team come back to you with a detailed answer on this one. She'll reach out to you. Me and Tatiana will reach out to you and provide you with a detailed answer.

Okay. We have a question from Sikhi, is asking, are you considering new segments over the medium-term?

I'll answer that one. Thanks for the question. So obviously, we had a 5-year strategy in Agthia. And the obvious question is we're now 4 years into that strategy or 3.5 years into that strategy. We're just in the process of refreshing our long-term vision for the company. We will be probably finalizing that over the next few months, and we'll be ready to talk to you about it. I think we've always been pretty consistent in the messaging that we've had on the strategy, which is the focus around the 4 pillars, potentially looking at some lateral expansion in terms to adjacent categories. But for the time being, our focus remains on driving the 4 pillars that we have. We're not short of opportunities for growth. I think one of the big discussions we're having with our teams is we need to make clear decisions about where the biggest opportunities are and doubling down on them to invest even more. So, make some decisions about what not to do and make -- take some decisions about what to dial down and make some decisions around where we really see competitive advantage and the opportunity to dial up. So that's a piece of work that's ongoing at the moment.

He's also asking about the return on invested capital target of 9% to 10% for the group. How do you view this against peers, against global peers.

So, let me take this one. So, I think the matter guidance as at the end of 2025, and we are lining significant business work to refresh our strategy for the next 5 years. And I think we will come back to the market with the details of that sometime next year. That will include a revised mid-term guidance. In terms of where that takes us competitively, I think if we recall when we issued the mid-term guidance, we come from at least where we in '21, '22. We've been performing below over the last couple of years, we've closed a performance gap in our performance consistently. Now, is ahead of the index as well when you look at the way the share prices moving to support in a value competitive place, but it will be the first to new strategy.

Okay. Thank you. There is another question in the chat box. Other income seems sustained at these levels when compared to last year, do you anticipate these levels to maintain going forward? And he's asking if there was any contingent liability gain in the first half of 2024. And would this continue, and until when?

We don't have a contingent liability gain or loss in the first half. On the details of other income and other expenses, I'll let the IR team come back to Sultan offline, similar to the previous question.

Okay. We have a question from Belel Sabbah.

Yes, hi, and thank you for the opportunity to ask questions. And I realize you just mentioned that you'd update your medium-term guidance in due course. So, forgive me for asking about it. But just in terms of how we should think of margin improvements going forward, you've obviously done a phenomenal job in improving margins so far, whether it's on the cost side or on the business mix side. But for the medium-term to reach 8.5% or 10% margin, there would still be quite a bit of gains to be made. So, should we think of it more as business mix, manufacturing efficiency type improvements? Or are you seeing more on distribution, G&A-type efficiency?

Look, so I think it's important to realize that Agthia is multiyear growth and profitability improvement story that we would like to say still a very early days. So, we have acquired 6 businesses in 2 years, and we did a significant job in integrating those businesses and driving synergy out of them. And we continue to squeeze this more and more, and also building back-office capabilities and synergies being in value chain or supply chain area, finance, human capital, et cetera. At the same time, as the business grow, we have better opportunity to drive procurement synergies, buying more efficiently and driving more central function leverage to the businesses we acquired. On top of that, there is, of course, gross synergies that we drive now between different business and different channels and customers. So, I think both the top line synergy and our bottom-line synergy will continue to favor the improvement in top line and bottom line. On top of that, as you see a significant step-up in our vision. That's now 45% of our growth, and that helps us not only grow faster, but also premiumize and drive better margin. There is a third element, which is a positive mix as we continue to grow snacking faster than average. Snacking is the highest profitability business unit for us. That also gives another profitability advantage. In terms of specific companies, we need to finish the work and come back to the market with what we think of this, but we'll not stop at those limits.

Sure. You mentioned that part of your business planning is trying to see where your competitive advantages are and wanting to focus on them. So, given that you're quite a diversified business, both geographically and in terms of your product mix. Could you share with us where you see your competitive strengths are at the moment? And maybe just kind of guide us on the areas that you'd like to focus on to drive the business going forward.

I'll take that one. So, it's a great question. I think if you look at where -- firstly, if you look at our business unit that's growing the fastest, most profitable business unit is our Snacks platform. What's helping us in that space is obviously the continued growth in our date business. And our dates business really has been about increasing our geographic footprint, so increasing our level of exports. So, we're growing India very fast. We're growing in Indonesia. We're growing in Malaysia, Bangladesh. So, the Muslim market to the Far East. But we're also, at the same time, expanding into new markets, whether that be Europe, whether that be the U.S., whether that be Brazil, even into Mexico. So, new opportunities, new markets with, in many cases, well new categories in those markets gives us an opportunity to price and price the product accordingly and improve the overall mix in the business. I think the question around where we want to spend our time and efforts. So snacking is definitely going to be a core element of that and how we take snacking beyond. Even in Egypt, you see our coffee business is growing very strongly, outgrowing the devaluation, which is phenomenal performance. And that's really off the back of penetration. So, opening more and more stores in Egypt, taking our products, our coffee portfolio and our broader snacking portfolio in Egypt to more points where consumers are, whether that's in accommodation blocks, hospital blocks, universities and airports. We're really, really focused on tapping into the growth potential of those more premium products that we're selling today. Even if you look in our water business, for a long time, it was considered a challenged category in Agthia, which is talked earlier about mix. So, you can see our glass bottle business growing our more sustainable platforms growing. Our UAE water business growing at around 8%, it's faster than the category in the UAE and a lot of that is coming from mix and from value generation. And then even within the water business, our home office water business is growing at 10%. And that's really about taking consumers directly into people's home. And again, it commands higher gross margins and commands higher net profit. So, really, I think what we're -- as you say, we're nicely geographically diversified at the moment. Our ability to be able to ride some bumps in some markets or in some categories at a given point in time is the way that we're able to manage our overall performance and particularly our profitability in the business. It allows us to make the right choices between revenue and profit at the right time. So, I think you're going to see decisions around that space. Snacking will be important element of that. We've been very clear in the past that protein is an important platform. Give or take some headwinds, we have the investments in -- again, in Saudi Arabia with the new facility is another example that we see that as something for the future. But even if you take our core businesses at how the premiumization in those portfolios, some consolidation is there to potentially further unlock profitability. So, we'll come back with all the answers later. But I think if you look at the portfolio today, we do have some decisions to make. There's some stuff that we need to stop doing or to deprioritize. And obviously, some of these high-growth opportunities, how do we accelerate dates faster, for example, will be the kind of questions. We're going to come back and answer.

One last question. Do you see any change in the subsidy environment? Correct me if I'm wrong, you do receive some form of support on the date business?