Agthia Group PJSC (AGTHIA) Earnings Call Transcript & Summary

Hello, everyone. This is Hatem Alaa from EFG Hermes, and welcome to Agthia's Full Year 2024 Results Conference Call. We'll start off by a presentation from management, and then we'll open the floor for Q&A. [Operator Instructions] I'll now hand over the call to Tatiana Vlasova, the company's IR Director. Tatiana, please go ahead.

Thank you, Hatem and EFG Hermes team for hosting today's call, and thank you for joining us today to go over Agthia Group full year 2024 results. On this call, we are joined by Agthia Group CEO, Alan Smith; and Group Acting CFO, Hala Katounas. Alan provide an update on progress of Agthia strategy, while Hala will cover our financial performance. After that, we will open the floor for the Q&A session. For your reference, the investor presentation will be available in the Investors section of the company's website at agthia.com at the end of this call. Please note that the contents of this call may contain forward-looking statements, which should be considered in conjunction with the disclaimer included in the presentation. Over to you, Alan.

Thanks, Tatiana. Good afternoon, everybody. I hope you're well. Thanks for joining us today. I think just in summary, 2024 was a year of both significant progress but obviously ended with some challenges for Agthia. Whilst we delivered strong top line growth, we also face some short-term operational challenges in our Dates business, which given the seasonality, we'll continue to have some residual impact on our performance in 2025. Despite these challenges, our focus remains on course correcting fast in the near term, whilst delivering long-term consumer value, as we always do. So moving on to our strategy. On the growth side, group net revenue grew 7.7% year-on-year, largely driven by volume growth, with some pressure on pricing obviously driven by easing of inflation and commodity costs. If we adjust for the exchange rate of EGP 40 on which our guidance was based, our revenue growth would have been 9.7%. Innovation continued -- sorry, innovation contributed AED 159 million to revenue growth, while e-commerce sales grew by over 50% in 2024 representing 5.4% of our total core sales. The launch of the IQF strawberry line in Egypt and new facility in KSA marked significant milestones in expanding our production capabilities in important markets and contributing to improved operational efficiency, whilst reinforcing our ability to scale strategically. These initiatives strengthen our ability to serve regional and export markets and support that long-term growth strategy. On the efficiency front. Operational efficiencies in 2024 delivered AED 113 million of productivity. Cumulatively since January '21, our productivity gains have exceeded AED 300 million, surpassing our initial strategic target of AED 200 million and allowing us to invest in capabilities. Our UAE bottled water business continues to thrive, delivering a 37.5% increase in EBITDA, supported by a favorable mix -- a favorable shift in both mix and operational efficiencies. Additionally, the continued turnaround of the Saudi Water business resulted in over 30% EBITDA growth in 2024, driven by enhanced cost control measures and smart pricing. We continue to take proactive steps to optimize our portfolio, which included the strategic exit from the nonperforming UAE dairy business, the Yoplait license. This decision enhances profitability of our Water and Food segment, while allowing us to sharpen our focus on the growth and development of the core businesses. Egypt continues to be a key pillar of growth, leveraging its strong brand equity, smart pricing strategies and outstanding market execution to drive performance. The successful execution of our export growth strategy has further strengthened our positions with exports from Egypt, reaching new highs, growing over 50% in 2024 and reinforcing our resilience despite the macroeconomic pressures that Egypt has seen. Moving on to capabilities. Product innovation remains a key priority with new launches in Snacking, Protein and Agri-Business that expand our portfolio and enable us to effectively differentiate our brands in competitive markets. We continue to invest in digital transformation, enhancing our e-commerce, which supported the growth and leveraging AI to strengthen our operations. We are at the forefront of AI implementation, using it to enhance facility safety in 2 of our factories and improve efficiency of operations. This includes AI-driven solutions to optimize productivity, streamline supply chain process and enhanced quality control, particularly in our Dates business. On the sustainability front, we remain committed to responsible business practices, reducing CO2 emissions by 6.3% year-on-year. Additionally, sustainability-driven cost optimization initiatives delivered total savings of almost AED 9 million, including AED 3.3 million in savings from reduction in packaging. As we enter 2025, we recognize the challenges but remain focused on execution. Our priority is to continue strengthening our fundamentals, drive innovation and capitalize on new opportunities to ensure Agthia's continued long-term profitable growth. I'll now hand over to Hala, who will take you through financials.

Thank you, Alan. Good afternoon, everyone. Let me first run you through the key headline figures for 2024. Revenue grew by 7.7% year-on-year to AED 4.9 billion, driven mainly by the strong volume growth. It's important to note that this comes despite absorbing a significant impact from the EGP devaluation, which impacted us around -- which impacted around 20% of our business. On the profitability side, EBITDA declined by 1.5% year-on-year to AED 679 million with margins standing at 13.8%. The primary pressure came from the Dates business that we will talk about in more detail later, but we are taking active steps to improve inventory management, enhance receivable collection and optimize operations to restore profitability. We recognize that this performance falls significantly short of our guidance. However, as highlighted earlier, the main driver of this shortfall was the challenges in the Dates business. Reported net profit increased by 7.4% to AED 322 million with a stable margin of 6.5%. Net profit was impacted by the same operational challenges affecting EBITDA, in addition to absorbing the newly introduced corporate tax in the UAE in 2024. Looking ahead, we recognize that some challenges remain, but we are committed to tight financial controls to improving margins and to driving efficiencies. By strengthening our portfolio, optimizing operations and continuing to invest in long-term growth initiatives, we remain confident in delivering sustainable and profitable growth. With that, let's move to the next section. Earnings per share increased by 7.9% year-on-year, slightly above reported net profit growth. This is due to the consolidation of additional minority stakes in Abu Auf, BMB and Atyab that happened throughout 2024. At the same time, we continued optimizing working capital, reducing it by 160 basis points as a percentage of sales to 7.3%. This was primarily driven by inventory discipline and more favorable credit terms. Our cash conversion cycle improved decreasing from 68 days to 45 days. This was mainly due to the implementation of supplier financing. Despite continued working capital optimization and additional cash release, the impact on cash flow in 2024 was less pronounced compared to 2023, and this is because by the end of 2023, working capital had already been reduced to a relatively low level for Agthia, limiting the incremental cash flow benefits in 2024. Capital expenditures declined by 13% year-over-year, reaching AED 187 million, reflecting disciplined capital allocation and optimization of investment spending. Free cash flow stood at AED 496 million, a 42% decrease year-over-year. This decline was primarily due to the lower working capital improvement compared to 2023, as I've explained earlier, as well as an advanced cash inflow received at the end of 2023 related to the retrading activity in Q1 2024, which temporarily benefited the net working capital. Excluding this, underlying free cash flow remained strong, demonstrating the company's focus on cash efficiency and financial resilience. So our balance sheet remains strong with low leverage and ample borrowing capacity to further support future growth. Net debt-to-EBITDA stood at 1.5x, slightly above the 1.3x level in FY 2023, primarily due to the stake consolidations we made in our subsidiaries in 2024. Our debt is dollar and dirham-denominated, and we continue to achieve favorable borrowing terms from our supportive network of lending banks. Interest coverage improved significantly to 9.4x, compared to 7.6x in 2023, driven by effective refinancing initiatives following the rate cuts. Our borrowing capacity remains high at AED 1.7 billion, reflecting our ability to access capital to fund strategic initiatives. The average dividend yield stood at 3%, demonstrating our commitment to delivering value to shareholders. Overall, our robust financial position provides the flexibility needed to support both organic and inorganic growth opportunities, while maintaining healthy returns for the investors. So as we highlighted earlier, in 2024, revenue grew by 7.7% year-on-year with strong contributions from Snacking, from Agri and from Water & Food. Growth was driven by higher volumes, partially offset by lower pricing. Protein & Frozen put pressure on the group performance, impacted mainly by the EGP devaluation and some market pressure in Jordan. Without the impact of the EGP devaluation, group revenue growth would have been at 16.7% year-on-year, reflecting strong underlying momentum across our portfolio. We'll discuss the performance of each of these segments in more detail shortly. Group EBITDA declined by 1.5% year-over-year, mainly due to the operational challenges in the Dates business. Excluding the impact of the EGP devaluation, EBITDA would have increased by 11% year-on-year, reflecting strong performance in other segments. As shown on the slide, the major impact on EBITDA came from snacking, which was affected by operational headwinds in the Dates business. Protein & Frozen delivered moderate profitability expansion despite the devaluation. Water & Food contributed positively to EBITDA growth and Agri-Business also made a strong contribution. Other costs, including digital and capability investments had a negative impact. Group net profit increased by 7.4% year-over-year and by 24.5% when excluding the Egyptian pound devaluation. As with EBITDA, the main drag on net profit came from snacking, where operational challenges in the dates business had a significant impact. It's also important to note that 2024 marks the introduction of the corporate tax in the UAE, which had an impact of approximately AED 22 million on the bottom line. So moving on to segmental analysis and aligned with our strategy to diversify the business and expand into high-growth segments in large scalable markets, revenue is now at almost evenly split across the 4 segments with roughly 50% coming from outside the UAE. Snacking. So snacking in 2024 grew 14.7% with Abu Auf up 33% in dirham terms. Abu Auf holds a market leadership position in Egypt, actively expanding its store network, having opened 59 new stores on a net basis during the year. The brand continues to excel in product innovation, staying ahead of consumer trends and attracting a growing customer base. This strong momentum in Abu Auf was a key driver for the segment's growth. However, the dates business within snacking segment faced challenges this year. Since acquiring Foah, we targeted an ambitious growth trajectory, but recognized that certain operational capabilities needed strengthening. Procurement and sales planning issues, coupled with a temporary focus on opportunistic one-off sales led to an oversupply situation this year. This created pressure, including the need to write down a portion of our dates inventory due to expiration and quality concerns. We also encountered receivables collection challenges, prompting us to create provision in line with our internal policies. Additionally, we experienced gross margin compression, as we released last season's crop at deeper discounts than initially anticipated. While corrective measures are underway, we anticipate some residual impact into early 2025 -- I would say, the first half of 2025 as we reset the dates business for sustainable long-term growth. However, we still firmly believe in the potential of the dates business as a category. Moving on to Protein & Frozen. This category faced some macroeconomic pressures on revenue, but achieved margin improvements throughout the year, given the smart pricing, portfolio rationalization and operational efficiencies. Our Atyab and Nabil brands maintained their market leadership positions in Egypt and Jordan, respectively. We also expanded our export operations in Egypt with the new IQF line launched in January 2024, which is now fully operational. And cumulatively, Atyab and Al Ain delivered 35.2% revenue growth in Egyptian pound while significantly expanding their profitability. Our Saudi protein facility is gradually ramping up, and we are currently advancing Phase 2 of the project, which will further expand our production capacity in the Kingdom. Water & Food. In that segment, revenue grew by 7.4% year-on-year, driven by premiumization and innovation. UAE Water delivered 9.6% revenue growth with Al Ain bottled Water retaining its market leadership position. The products introduced in 2023, namely the premium glass bottles, the 100% recyclable PET bottles and the plant-based bottles continue to perform well, supporting margin improvement in the category. Internationally, revenue also saw strong growth, increasing by 4%. And lastly, the food business also performed well with revenue growing over 10% year-on-year. This was supported by the distribution agreement signed for the Australian rice in the UAE. EBITDA grew by 17.5% year-on-year, more than twice the rate of the revenue growth, driving 137 bps margin expansion. This was fueled by a combination of favorable mix and cost efficiencies in the UAE and in Saudi Arabia. UAE bottled water delivered notable EBITDA growth of 37.5% year-on-year. Our Saudi business continued to improve profitability with EBITDA growing by 30.7%, well ahead of revenue, driven by smart pricing and market positioning. As announced last quarter, we exited the Yoplait dairy business, resulting in a one-off impact of AED 10 million on EBITDA in 2024. However, this strategic move is expected to generate annual savings of roughly AED 5 million, further strengthening the profitability of the Water & Food segment. Finally, looking at our Agri-Business, which includes flour and animal feed, revenue grew by 8.6% year-on-year, largely driven by volume growth as we further strengthened our market leadership. This was supported by increased capacity at our Grand Mills facility and wheat trading activity. We continue to gain market share in both flour and animal feeds, reflecting the consistency and the high quality of our products. Animal feed revenue grew by 5.2%, driven by higher volumes, though partially offset by lower prices due to commodity trends. Strong results in feed were supported by effective open market execution, participation in ADAFSA's compound feed program and new product development. Sales through the Agrivita app continued to perform well, enhancing customer convenience and further strengthening our market position. EBITDA grew by 35% year-on-year, significantly outpacing revenue growth. This strong performance was driven by an improved product mix and continued cost efficiencies. A few words about our Egypt business. We continue to leverage our Egyptian platform with our combined businesses in Egypt delivering 8.1% revenue growth in dirham terms, despite the EGP devaluation and EBITDA increasing by 40%. Exports from Egypt grew 52%. As shown on this slide, Abu Auf performed exceptionally well, continuing to open new stores and strengthening its brand presence in Egypt. Al Ain Egypt remains a strong performer, supported by its export-oriented strategy and the successful organic expansion with the addition of an IQF strawberry line launched at the beginning of last year. While Atyab is facing some revenue pressure, we are actively expanding our portfolio into Tier 2 and Tier 3 categories to broaden our customer base. Thanks to smart pricing and operational efficiencies, Atyab's profitability improved by 92 basis points. Coming on to dividends. I'm pleased to announce that our Board of Directors has recommended a 19% year-on-year increase in cash dividends to AED 175 million for the full year of 2024. This is equivalent to 21.03 fils per share. As you may recall, we already distributed an interim dividend of 10.31 fils per share for the first half of 2024. This means we are proposing to distribute 10.72 fils per share for the second half of 2024, in line with our semiannual dividend policy. This, of course, is still subject to approval of the Annual General Meeting. The strength of our diversified portfolio and our unwavering commitment to operational excellence have supported us on our growth journey, despite the challenges that we had in the dates business in 2024. Business remains robust across all segments, and we are confident that the strategic decisions we are making will continue to drive long-term value creation. Before we open the floor to Q&A, I'd like to address our guidance for 2025. Given the ongoing transformation of our dates business and the corrective actions underway, we believe it is prudent to withhold formal guidance at this stage. Our priority remains on resetting the dates business and ensuring its return to sustainable growth. We will come back. We will provide a clearer outlook and an updated guidance once we finalize these initiatives. I'll now hand back to Alan for closing remarks before we open the Q&A.

Thanks, Hala. So I'd just like to take the opportunity before the Q&A just to reform our priorities for the year ahead. Obviously, the fundamentals of the business, as you've seen from the presentation, remain strong. We are resetting our dates business. We've made some clear and immediate interventions to affect that. Our top priority, therefore, is to fix the issues in the dates business short term, while continuing to drive operational efficiencies and strengthening our market position across the core portfolio. At the same time, we remain committed to sustainability and responsible business practices, not just as a strategic priority but as a driver of tangible savings that support profitability. Digital transformation will remain a key enabler, helping us to enhance agility, optimize our decision-making and improve consumer engagement. Whilst those near-term challenges will take a short period of time to resolve, we are taking decisive actions to address them, ensuring Agthia remains well positioned for long-term sustainable growth. Thank you for taking the time to listen today. We'll now pause and open the floor for questions.

[Operator Instructions] We'll take the first question from the line of Bulent Yurdagul. We have some audio issues. We'll try again. We'll take the next question from the line of Nishit Lakhotia. Okay. We'll take a question from the line of [ Ibrahim Al-Hassan ].

Okay. Management, congratulations on the set of results. Two questions from my side. So you mentioned that you booked a receivable provision and inventory write-down. So can you quantify the amount related to those one-offs at least?

Hala, over to you.

Yes. Ibrahim, thank you for your question. As you know, we've published our audited accounts yesterday, so the numbers are available there. The provision for the full year is standing now at -- in terms of the receivable, at AED 64 million, of which we've taken AED 52 million this year. This is on the receivable side. On the inventory side, we've taken AED 53 million of inventory this year, yes. But this is not only -- it's not only -- this is across all the group. Yes. Ibrahim, just to elaborate on that. So maybe a little bit -- maybe it's worth talking a little bit about the challenges that we faced this year in the Dates business. So as we've mentioned earlier, we found ourselves a little bit in an oversupply situation on the Dates business. Those challenges surfaced in the fourth quarter of last year, which has put some pressure on the margins and on sales. And given that this is a perishable product, this has put significant pressure on inventory. And this is what resulted in those write-offs. On the receivables side, I mean, as the team was under pressure as well to increase sales over that period, we did find ourselves taking on a little bit more risk than we would typically do when it comes to sales. And therefore, this resulted as well in additional [indiscernible].

And just to build on that question -- or the answer to that question because I see another similar question on the chat box about what caused the oversupply position. Firstly, Agthia has grown -- or Al Foah has grown rapidly since we acquired the business in 2021 from around AED 450 million to around AED 718 million this year. During the same period -- and the business was historically based on just the supply of UAE dates. Now as we've grown, obviously, the harvest in the UAE hasn't increased and has actually decreased a little bit. So we've increased our international sourcing of dates from markets like Egypt, from Saudi Arabia, from Jordan, from Palestine and from North Africa. And the reality is that we made supply commitments this year to farms across the regions in excess of our capability to sell. So the growth ambition of the business was higher than the capability to sell it through and the understanding of the channels. Now the fundamentals in the dates category remains strong. It's just a question that internally within the Al Foah business, we got a little bit overambitious on growth without truly understanding the supply network and the route to market network for those new sources. So core dates business -- core dates market remains strong. As Hala highlighted during the presentation, some short-term chasing of trading volumes at low margins created pressure as we procured in -- committed to procure in dates without necessarily having the understanding or route to market to sell them out, which forced us to do some pricing and to take some short-term market impact. And as we said, given the seasonality of the dates business, dates starts to harvest in August and finishes around November time. And then the sellout period is typically from September through until April, May. So we have to resolve the balance of the inventories. But as Hala highlighted, we did take significant provisions at the end of the year to try and reflect as much as we could see on what the issues were in the business.

So -- sounds good. So the provision taken on the Dates business is from 2 sides, right, the receivable and inventory?

Correct.

Yes.

So can you at least quantify the amounts related to the date issues from receivable provisioning and basically write-down?

So I would say that -- I mean, you have the numbers in the audited financials. But I would say that on the inventory, over 70% of the provisions taken this year are related to the Dates business. And on the receivables side, over 80% of the receivables are resulting from the Dates business.

We will take the next question from the line of Shahrukh Nawaz. Shahrukh, we're unable to hear you. We'll take a question from the line of Pierre.

Okay. So most of my question was -- has been asked. It was concerning the provision and for inventories and receivables. I noticed in your financial statement as well that in your growth assessment for the goodwill for Foah, which was the Dates business, the assumption which has been written by auditors has been significantly reduced. Is it something which materialize a change in terms of market outlook? Or is it something you consider as negligible in terms of your business [indiscernible]

Sorry, we didn't...

Pierre, if I understood your question correctly, you're referring to the goodwill...

Yes. Absolutely.

And if you see, we have done -- yes, we have done a robust assessment of all our acquisition and the current goodwill on the books, and there has been no impairment that resulted out of that. The exercise involves proper detailed projections of every business and a proper valuation analysis, both DCF and comps. And Foah is very much still a strong business with strong prospects. And given as well where we acquired it at, we are very much in the money on that front.

Okay. And second question, regarding 2025. You mentioned that the first half should be still impacted by the difficulties in the Date business. Do I understand well when -- I believe that -- in fact, you will continue to have sales and trading on the Dates business, which will continue in '25 because we have not totally sold the inventory. We have build-up in these activities. Is this the reason for which the first half will be once again hit in terms of profitability?

Yes, Pierre. So what we're saying in the oversupply situation of dates, and just to bring some color to the numbers, we procured -- we received around 70,000, 80,000 tonnes of dates from the UAE. And during the course of last year, we procured around 45,000 to 50,000 dates from international markets. So the challenge is not with the UAE dates. They've got normal sales patterns. We sold heavily in Q4. That's continuing into the first quarter. The challenge is suppressed profitability on the dates that we procured internationally because our understanding of the purchase pricing versus the price realization -- let's just say we didn't have the depth of knowledge that we should have had. And that's one of the key things that we're now strengthening. So there will be some suppressed margins continuing into the first half of next year. On the international dates, the core business on UAE dates will continue to be profitable.

And just to add to Alan and maybe for everyone's purpose here, so the way the Dates business work, it's a harvest and it goes from August to July. And you contractually commit to the volumes ahead of that. So we are talking here about as well volumes pre-committed to, and therefore, that's why it will flow -- the residual impact will flow up until the harvest year ends.

We will take the last question from the line of the Sarah Alhanaya.

So this is Sarah from SICO Capital based on Saudi Arabia, Riyadh. I have two questions to ask. The first question is regarding your protein factory in Saudi Arabia, since it's progressing towards full capacity. What should we expect in terms of top line for the segment, since it declined by 1.7% this year? What should the outlook be moving forward?

Can you hear me? Okay. Sarah, thanks for the question. The facility came on stream around the middle of the year, around July, and it was a little bit slower starting up than we expected, not because of the facility, but actually because as you start a new facility with the same customers that you've serviced in the past from Jordan, you have to register both the products, you have to prove the quality and you have to get the facility approved for quality standards. So that took us a little bit more time than we expected. I think the capacity of the -- the current capacity of the facility is around 6,500 tonnes a year. We have a second line that comes on stream in the middle second half of next year. So we expect to reach full capacity on those lines. But some of that is a transfer of legacy business that was supplied from Jordan that's moving into Saudi. We're not going to give guidance on revenue related to the protein business. What I will say is protein still remains an attractive category. We expect to see during the course of the year -- obviously, in Q1, we're still lapping that March devaluation that we saw in Egypt last year that took the currency from around EGP 30 to the dollar to EGP 50. But beyond that, as we get into the second quarter and onwards, protein should see -- should be in a good position. And the other thing is we expect to start seeing some easing on the QSR volumes that were impacted last year because of the geopolitical situation. And yes, that Saudi ramp-up should support as well. So the fundamentals -- the underlying fundamentals, the rebound, hopefully, some stability in the Egyptian currency. I think the outlook for protein over the course of the year will improve, and we'll get back to the long-term growth that we've always expected from this category.

We'll take some questions from the chat. A question from Metehan from Waha. Would you please explain what you mean by resetting the Dates business? From what I understand, you are operating date countries and you annually harvest it. Was that a quality issue that arose in 2024 that led to subpar quality dates? If yes, what was the cause of it? And which player caused the oversupply in dates or the consumer behavior changed leading to reduce consumption? I'll ask the...

Yes, we're reading the -- so what percentage of date sales are exported or domestically consumed? Okay. I've explained the sourcing profile of the dates. So roughly...

But just before you start, Alan, one clarification. We don't do farming. So I think we need that...