UAC of Nigeria PLC (UACN) Earnings Call Transcript & Summary

Good morning, and good afternoon, ladies and gentlemen, and welcome to the UAC of Nigeria Full Year 2019 and First Quarter 2020 Results Conference Call. This conference call will be hosted by Mr. Folasope Aiyesimoju, Group Managing Director. Following prepared remarks by UAC's management team, an interactive Q&A session will start. I would now like to hand the call over to Mr. Folasope Aiyesimoju, Group Managing Director. Please go ahead, sir.

Thank you, Kay, and good day, and welcome to UAC of Nigeria's results presentation for the 2019 financial year and the first quarter of 2020. My name is Folasope Aiyesimoju. I'm the Group Managing Director at UAC. Ibikunle Oriola, our Group Finance Director, is unfortunately under the weather and unable to join us today. I hope that you and your loved ones are safe and healthy, and thank you for making time to join this conference call under what are very stressful conditions. I was appointed Group Managing Director just over a year ago, and I'm grateful for the support, candid feedback and encouragement, that I received see from many of you on the call. The session today is comprised of 2 parts. Prepared remarks followed by Q&A. We'll try to cover the prepared remarks in 15 to 20 minutes to leave sufficient time for Q&A. We'll be covering the following areas: firstly, we provide context regarding our performance. We talk a bit about strategic initiatives that have impacted our reporting, we'll provide an overview of our financial performance and reiterate our key priorities. I'll now ask you to turn to Slide 5. We are all acutely aware of COVID-19 and the devastating impact it is having on health care systems and economies, across the world. Nigeria has not been spared, and the government has implemented widespread restrictions in the movement of people and goods, in the slowing the pandemic spread. We, at UAC, have taken measures to protect the health and safety of our stakeholders and activated business continuity plans to minimize operational disruptions. The pandemic has resulted in economic headwinds that we expect to persist for most of 2020. Firstly, Nigeria is expected to enter a recession, with reduced aggregate demand for goods and services. The collapse in oil prices and reduced investment flows is likely to put pressure on the Naira. And we expect supply chains will be disrupted and capital investment delayed. With these assumptions about the operating environment, we have focused our short-term planning on business resilience and continuity. Longer term, we accept the lasting impact COVID-19 may have and aim to position ourselves appropriately. We're also doing a bit to alleviate the suffering, the pandemic has inflicted on some of Nigeria's most vulnerable constituencies, largely by dilating essential food and personal care items. I will please ask you to turn to Slide 6. The macro environment in 2019 was tough, with economic growth barely keeping up with population growth. And those of us operating in the consumer space felt this acutely. Inflation, over the course of the year, was in the mid-teens. Going into 2020, we expected a deterioration across key economic indices, and critically, we expect pressure in the Naira. On Slide 8, we outlined 2 of the key initiatives that impacted our reporting in 2019 and for the first quarter of 2020. The first relates to UPDC. In September last year, we announced initiatives in that's trending UPDC and positioning the company to operate as a stand-alone entity. This included a rights issue to recapitalize the business, plans for UAC to unbundle UPDC, and plan for UPDC to internal unbundle the UPDC-related investment trust of the REIT. Thus far, we have completed the rights issue and are in the process of obtaining regulatory approvals for the respective unbundling of UPDC and the UPDC REIT. Subject to rules, regarding social distancing, we will seek shareholder approval for the respective unbundling, later this year. In our accounts for 2019 and Q1 2020, UPDC is held as an asset for distribution to shareholders and treated as a discontinued operation in our income statement. We also announced the sale of an 8% stake in MDS Logistics to our partner, Imperial, in a transaction, that valued MDS at $40 million. Following that transaction, UAC's stake in MDS reduced from 51% to 43%. The sale was concluded in Q1 2020, and MDS is now accounted for as an associate and are certain no longer consolidated. This affects our Q1 2020 reporting in the following ways. Firstly, the income statement for Q1 2020 is not directly comparable with the income statement for Q1 2019, as MDS is not consolidated in Q1 2020, but was consolidated in Q1 2019. We also booked a NGN 3.1 billion gain on the fair valuation of our stake in MDS, which is reflected in our Q1 2020 accounts. I will now ask you to please turn to Slide 9. One of our stated objectives is improving government and management across the Group, and we made progress in this area. At the Group Board, Suzanne Iroche and Karl Toriola were appointed independent non-Executive directors. Suzanne Iroche has extensive experience in banking, finance and risk; and Karl Toriola who heads MTN's West Africa business, brings understanding of technology and of building businesses at scale. The Board of CAP was strengthened with the appointment of Awuneba Ajumogobia as Chair; and Udo Okonjo as non-Executive Director. Ms. Ajumogobia who also sits on the Board of Airtel Africa, brings strong leadership to CAP's Board and Udo brings extensive experience in the real estate sector as well as entrepreneurial drive. At Grand Cereals, Mr. Olabode Agusto and Daniel Obaseki were appointed non-Executive Directors. Many of you on the call will be familiar with Mr. Agusto, whose early contributions are proving to be extremely valuable. He anchors his decision-making on shareholder value creation. Daniel has knowledge of and relationships across the poultry value chain, which he brings to bear in crafting the strategic direction for the business. Finally, at UPDC, Mr. Kunle Osilaja was appointed non-Executive Director, who brings more than 3 decades of global and domestic related experience. We believe that these appointments strengthen governance across the Group, providing the necessary safeguards required to build lasted institutions. We have also made progress, strengthening management teams across our key operating platforms. Dele Ajayi has been appointed at UAC Foods; Deborah Nicol-Omeruah at UPDC; David Wright at CAP; and Alex Goma at Grand Cereals. Their profiles are on Slide 10. Each is a proven leader in their respective fields, and we're encouraged by their early performance thus far. On Slide 11, you would note that these executives have made progress in strengthening the management teams, to position their businesses for growth. With that background, I will ask that you turn to Slide 13, which provides an overview of our 2019 performance. We recorded earnings per share of 132 kobo in 2019, up 38% from 96 kobo, recorded in 2018. 2019 performance benefited from one-off gains on the sale of noncore assets, specifically, Real Estate and the winding down Warm Springs. Including results from discontinued operations, being UPDC, we recorded a full year loss per share of 183 kobo, this was driven largely by NGN 12.6 billion mark-to-market charge on UPDC's holding in the REIT. Positives from the results are the growth in revenue and gross profit. We grew our revenues 12% to NGN 79 billion and gross profit 26% to NGN 16.6 billion, recording gross margin improvement from 19% to 21%. It's important to note that the progress made, as regards revenue and gross profit and margin do not include any one-off items. These are organic. The key area that retains our focus is the pace of growth in operating expenses, which increased 27%, growing faster than revenue and gross profit. The ratio of operating expenses to sales increased from 15% to 17%. We have adopted a deliberate strategy to invest for growth, focusing on talent, marketing, sales and distribution, and we expect revenue growth will catch up to these expenses and drive margin improvement. UAC provided a NGN 16 billion bridge loan to UPDC, which is largely responsible for the negative free cash flow recorded in 2019. I will please ask you to turn to Slide 14. Financial results for Q1 2020 are not directly comparable with those for Q1 2019, as results for MDS were not consolidated in Q1 2019 -- were consolidated in Q1 2019, but not in Q1 2020. Earnings per share from continued operations fell 40% from 44 kobo to 27 kobo. Overall earnings per share for the quarter, however, were 85 kobo versus 23 kobo for Q1 2019. So it's largely on account of the fair value gain on our holding in MDS, which was partly offset by a further mark-to-market loss on UPDC's holding in the REIT. Like-for-like revenues grew 5%, with growth across all segments, aside from the Paints -- the Paints segment. Like-for-like gross profit grew largely in line with revenue with a marginal improvement in gross margins. Operating expenses increased 24% on a like-for-like basis, as we continue to invest for growth. Operating profit for the quarter was NGN 1.1 billion, a 23% decline on a like-for-like basis from Q1 2019. Free cash flow was negative NGN 5.6 billion on account of increased working capital in the Animal Feeds business as well as capital investment in the Packaged Goods business. I will now ask you to turn to Slide 15, which attempts to frame our focus on the investment for growth. Based on early feedback from some of you on the call, there is concern around the trend in operating expenses, specifically because we promised to focus on costs. At the top left of this slide, you would note that the Group has historically struggled to sustain revenue growth and suffered decline in gross profit and gross margins. As you see at the bottom left of that slide, in spite of very tight cost control, you'll see that, there was very little growth in operating expenses. The operating profit, within margins, declined. Our focus is on reversing this trend and driving profitable top line growth. This, we believe, will translate to margin expansion once the cost base is stabilized. Our spending is focused on areas that stimulate growth, including supporting our brands, investing in sales infrastructure and attracting the right talent. As Kunle is unfortunately not with us today, I will ask you to turn to Slide 16 to go over the financial highlights. Slide 16 summarizes our income statement, the highlights of which I've covered, earlier in this presentation. An area to touch on is the 17% decline in net finance income on account of the loan to UPDC. I have also discussed most aspects of the Q1 2020 performance and explained that these figures are not directly comparable with Q1 2019. Free cash flow, as I mentioned, was negative in 2019 and accounted a bridge loan to UPDC. In 2019, working capital was positive, and CapEx was below levels recorded in 2018. For Q1 2020, deliberate investments in working capital and the Animal Feeds business, resulted in negative free cash flow. And this decision was taken to ensure that we didn't suffer any COVID-induced supply chain disruptions to operations. We also made a significant capital investment in the UAC Foods in that expanding capacity. Slide 18 reflects our financial position, which is not comparable year-on-year on account of the changes we've discussed. You will note that the Group maintained a healthy cash position, with NGN 24 billion in aggregate. And total debt, aside from UPDC of NGN 6.5 billion, comprised of short-term working capital funding for the Animal Feeds business. Working capital days improved largely in account of the -- in consolidation of UPDC and changes to the buying strategy for the Animal Feeds business. Capital expenditure was largely focused on UAC food and MDS Logistics. At UAC Foods we've expanded production capacity and distribution capacity. And at MDS, we invested in our transport business. On Slide 19, we highlight the financial position for Q1 2019, which indicates a reduced cash position, largely, as I mentioned, on account of the buildup of inventory in the Animal Feeds business and CapEx at UAC Foods. The Group, excluding UPDC, continues to remain cash rich. Working capital days increased on account of the aforementioned inventory buildup, which we did to avoid any disruptions to production in that business. On Slide 20, we highlight UPDC's impact on financial performance, which has historically been negative. The table on the top left outlines the categories of impairment UPDC has recorded, with an aggregate of NGN 14.5 billion in 2019 and a further NGN 1.8 billion in Q1 2020. As of the end of the first quarter, UPDC's debt comprised of NGN 4.3 billion outstanding on its bond and NGN 17 billion of loans from UAC. The bulk of UPDC's obligations at UAC have been converted to equity in the recently completed rights issue. I will now spend a few minutes discussing the performance for the underlying operating segment in 2019, and after, then kindly turn to Slide 23. The Animal Feeds segment delivered top line growth, driven by improved pricing and volume growth. Procurement gains and improved raw material conversion translated to gross margin improvement. A key concern in this segment is that in spite of improvement delivered in 2019, return on invested capital remains suboptimal, and our focus is on improving this. The Packaged Foods business performed well in tough market conditions, growing operating profit by 15% on account of an 8% growth in revenue and margin expansion. The business benefited from investment in production capacity, marketing and distribution. The Paints business delivered 5% revenue growth, but saw declines in profitability on account of investments for growth. In the Quick Service Restaurants business, we launched a new corporate store, which delivered top line growth, and we continue to assert this business, focusing on our ability to attain scale. Performance in the Logistics business was mixed. We saw a decline in the core warehousing business, which negatively affected profitability, but identified growth opportunities in the transportation segment, the benefit of which we've seen come through, in the first quarter of this year. At UPDC, the focus for most of last year was on aggressive cost control and liquidity management. Post completion of the rights issue, management is currently focused on growth initiatives. Slide 24 summarizes the financial performance for the operating segment in 2019, which I have just spent a few minutes, discussing. In conclusion, on Slide 26, we are cognizant of COVID-19 and its impact on the Nigerian economy, and we'll work to build resilience in our businesses. We will, however, keep an eye on opportunities that may emerge in spite of the macroeconomic headwinds. A key priority for us remains a strategic initiatives relating to UPDC. We will continue to assess our structure, exploring avenues to drive efficiency by rationalizing excess capacity and eliminating duplicated costs. People and ensuring the right quality and composition of our teams is a key priority, and we are focused on closing key gaps in the org structure. In certain instances, we've suspended or deferred recruitment in light of COVID-19's impact. COVID-19 and the impact it had on our businesses, has highlighted the importance of technology, and we're going to focus increasingly on exploring ways to maximize this. With this, I will -- we'll move over to the Q&A segment of the session. Thank you.

[Operator Instructions] Your first question is from Fola Abimbola.

Just a couple of questions. And my question is actually focused on Q1 numbers. So in the breakdown of your earnings of -- during -- in this segment and one is just on the notes, that replace -- that sees order other income lines. Could you just give some color on what the earnings are there? And then next question, I notice that the breakdown of your earnings in your press release is -- are no longer detailed as before, where you used to keep breakdown by company and not just segments? Should we expect this to be normal? Next question is that the PBT of your Animal Nutrition business was down 91% year-on-year. And when you compare this quarter-on-quarter, it's almost a 99% decline. Given that Livestock Feeds, they've not really released their Q1 results, could you just, I mean, point to me which of the companies were responsible for a larger part of the decline, excluding Livestock Feeds and Grand Cereals. And what would you say will be because of the decline? Have there been any price increases, within the Paints business over the past year? I know you mentioned that on the operations business and margins. Just wanted to know you've done some Paints? And last question is how is the FX environment effecting your business, both directly and indirectly.

Those were -- I hope, I got all the questions, and I'll attempt to go through them in turn. So I think, your -- the first one I got was the press release is no longer been as detailed. I think -- by way overall context, we take Investor Relations extremely seriously. We have just recruited a new head for Investor Relations function, who started with us in June. And we're going to try to maintain a very even pace of disclosure by the course of the year. Twice a year there will be detailed presentations that go into segmental performance, that'll be for the full year and for the half year. And every quarter, there will be the overall presentation with the press release. So that's the pace that we plan to go through. As I mentioned that the dedicated executive is going to focus on this, and we'll take feedback from the investing community about any changes we should make. PBT decline for the Animal Feeds business is actually quite interesting. Livestock Feeds grew very strongly in the first quarter. From memory, Livestock Feeds grew its operating earnings by about 43%. And the decline was actually more attributable to Grand Cereals than Livestock Feeds, and there were 2 primary things that occurred there. The first is the management team at Grand Cereals is very new. The CEO and his team were all recruited in the last quarter of last year. So there's an elevated cost base, and we haven't begun to see the impact of this team come through fully. And the second is that the business has changed its formulation, largely around fish feed, and that improve -- that increased costs and also impacted margin. But there are specific initiatives that have been identified to take cost out of the business. And if we look at the trend, January, February, March, we saw a reversal of that dip. So in sum, it's not Livestock Feeds, although, they haven't published. They have -- they recorded strong growth in the quarter. It's more an account of Grand Cereals. Have we taken price increases in the Paints business in Q1? No, is the short answer to that question. So the growth in CAP that you have seen because CAP's publishing result was largely volume-driven. And the core mandate to David Wright and his team at CAP's growth. Its growth, in particularly, volume growth. And we have gotten feedback from the market that CAP's products had been priced to a level of discomfort. And so the core strategy there, not to keep the same price to drive revenue, but rather to grow underlying volume. FX impact on our businesses. So far, I think, I can speak about what has happened so far and what we expect to happen. As you know, every single company in the business is exposed and maybe I'll say in the country, is exposed to a greater or lesser degree to foreign exchange. The most sensitive will be the Paints businesses, which have the greatest component of important raw materials. And the other extreme, you will have the Animal Feeds business, which, although, we have a significant portion of domestic raw materials, those agricultural commodities would respond to the FX rate. The -- over the -- depending on where the FX rate settled, we'd expect there to be increased raw material cost pricing, and we would take our profit pricing decision at the time to protect the margins of the business. And it's less about trying to protect its theoretical margin and more ensuring that we are priced appropriately to ensure we can replenish inventory at the new purchase cost for those items of inventory. I think those are the points I noted. I don't know, if I missed any of your questions.

Okay. So there's just one question, which you haven't taken. So I was asking about the segments analysis of your financial statement, not the stated line that is attributed to orders. And the numbers, they are quite substantial, slightly would -- what's on line. So in the quarter, there was a revenue of around NGN 177 million and then a PBT of 541 -- of NGN 542 million. So I just wanted to clarify what this softness of revenue are within that space?

The other income in the group accounts would vary, very much from subsidiary to subsidiary. So you would have still of unused inventory in certain instances, you have non-cost services in certain instances. The -- I don't recall anything material, and I don't have the question that's in front of me, will come back to you for -- in the end of the call. But if you're referring to a significant other income item, it is the only big other income item in the Q1 accounts was the gain on the sale of 8% stake in MDS, which amounted to just over NGN 500 million. So I assume that's what you're referring to?

Your next question is from Abiola Gbemisola.

I ask, there's probably 2 questions. So the first is the rights issue now is concluded. I won't go [ to presume ], and I want you to try [ clarify that ] was done by utility. I just like to get the breakdown of how [ situation ] was like about that issue? And did UAC had come back to that loan, you said previously, you did come back [indiscernible] previously? That's the first question. The second question is that you mentioned something, I forgot, Warm Springs. Warm Springs was you said it was winding down. So is it the company closing down? Is there -- if that is so. What [indiscernible]. So those are my 2 questions in respect to your guidance.

Okay. Rights issue for UPDC is completed. UAC did convert the significant portion of its loan to UPDC into equity and the rights issue. Overall, there were roughly 240 subscribers. I think, external capital for that rights issue was about NGN 250 million, which reduced the portion of UAC subscription. And then for the rest of the offer was a conversion of UPDC -- of UAC's loan to UPDC. I mentioned the 2019 accounts have been a big line item of nonrecurring income. And I said that the big component there, roughly NGN 650 million and about NGN 300 million, where NGN 650 million from the sale of noncore assets, and roughly NGN 300 million was the proceeds of the liquidation of Warm Springs. So that has gone ahead. I was referring more to its contribution to the result in 2019.

Your next question is from [indiscernible].

I have just 3 questions. First is on the impact of the lockdowns, generally across the business. If you like to just describe or maybe just provide color on how has it impacted your businesses, negative [indiscernible] senior exchange? Is it positive or negative? What are you seeing there? Your Cereals business, your Animal Feeds business, your Foods business, just context as to how the lockdown is impacting sales across your various subsidiaries? And where you're sort of seeing, I mean, we've been in a month in lockdown and sort of what do you think, if it continues, kind of impact you'd see on revenues and things like that? Secondly is on devaluation. I know you mentioned it but if I will suggest, come up a number, I'd say, you saw for the 15% devaluation. What impact does it have on your margins, if you see EBITDA margins maybe, gross margins [indiscernible]. And then thirdly, you also going be [indiscernible] your Animal Feeds -- you mentioned the Animal Feeds the returns there are quite low. And where do you think is a steady state level? Or where do you see is what you would like to see for the businesses as your preferred level of ROIC for your Animal Feeds business as well as your Packaged Foods Business? Or what do you think you are tenable? And then secondly, what do you think -- what levels do you need to follow to unlock, or [ harder ] to pull to get to that ROIC level? What do you think are the key things that you need to pick around those businesses to sort of get it changed to move to much higher or much prepared ROIC level? And then I noticed, you didn't pay a dividend last year. Also, it will be a difficult question to sort of see in -- on that core IPO maybe also a question, has there been any change in UAC's dividend policy? Maybe any color on that, that will be helpful.

Very clear, thank you. So I think your first question was around the impact of the lockdown on the business. And if any of our businesses benefited. I would say the short answer is no. None of our businesses benefited from the lockdown. The lockdown, fortunately, is already been lifted, but the businesses performed very differently under the lockdown. And I would say, they performed roughly in line with our expectation, going in. Going into the lockdown in COVID planning, and in looking at what has happened in price impact and periods of disruption, we find that the more essential element of our portfolio -- and -- of this, the most essential are the Animal Feeds businesses as long as farmers have their birds and fish, they'll keep feeding them. And edible oils is a staple, performed better than the more discretionary and sizable businesses. So if I sort of split the portfolio into very essential, very discretionary and in the middle. At the very essential end of the portfolio, Animal Feeds business is, even during the lockdown when there was no interested movement, and there were significant restrictions within states, we're still tracking at about 80% of prior year's performance. At the very discretionary end, which I think, like Paints and Quick Service Restaurants, we saw top of much of the month dropping below 25%. In the middle is our Packaged Foods and Logistics businesses. Logistics was still tracked in as close to 70% of the prior year, Packaged Foods, more like 50%. And in the Packaged Foods' basket, we have the snacks being somewhere in the middle, the ice cream being viewed as more discretionary, and therefore, the harder hit and Water been almost unimpacted by the lockdown. So in summary, varied by the portfolio, if I try to distill it. I would say that overall, would have been between about 60% during the most intense point of the lockdown. But already -- in the week post lockdown, we've already seen significant rebounds in many of these businesses. Impact of devaluation is a very tricky one because there's the short-term impact and then there's a longer-term impact. And what happens in the short-term is that the margins contract. Now I cannot tell you what is going to happen in this particular scenario because I do not know where the currency is going to end up. What we have assessed is what happened, the last time, the currency devalued. The last time the currency devalued, it devalued by 125%. And in that time, the Paints business saw about a 6% year-on-year contraction in its gross margin between '14 and '17. The Animal Feeds business was much less impacted, that was about 5% -- 3% to 5% contraction in its gross margins. The Foods business was largely unimpacted because there was pricing sizing down to mitigate that. So it varied, with Paints being hardest hit, and again, the more quote-on-quote essential businesses being less impacted was what we saw, the last time there was a devaluation. It's difficult to form a review. We scenario plan at various potential levels of the FX, but because we do not know where it's going to end up, it's difficult to put a line in the sand and on where the margins would end up. ROIC for the Animal Feeds business, there are 2 big levers within our control. One lever is margin. And I think what we are doing, both for Grand Cereals and Livestock Feeds is trying to push the higher-margin segments of those businesses. And the second big lever is asset utilization. We are cognizant that we have at least 2 large underutilized assets in that portfolio. And if we can drive our asset utilization up, we get the ROIC up. And then finally, the final lever is if we improve our asset utilization, we can shed excess assets. So the levers we are pulling are focused on margins and focused on improved asset utilization and eventually, shedding excess assets. The Group-wide targets that we have for ROIC is 25%. This company is a very long way, away from that, and we haven't changed the Group-wide target. So we're going to keep driving the business towards attaining the Group-wide target. Dividend policy has not changed. We're having to take decisions around dividend at the depths of the COVID-19 crises, in which nobody knew, and frankly, nobody knows now, how long or how deep the implications of COVID are going to be. We felt it was prudent to do all we could to protect liquidity, which is why we treat the dividend for this year, but it should be viewed by no means as a change to long-term policy and more a reaction to a very specific set of circumstances that we continue to review and will change as soon as those circumstances alleviate.

Your next question is from Danesh Ranchhod.

I've got 2 questions. The one question, I think, may have been partly answered already, but I'll just ask you, just for some clarity. On the -- I'm referring to the first quarter 2020 numbers. For the Animals Feeds business, you mentioned that it was actually the Livestock Feeds, that grew strongly. But when I look at the first quarter 2020 on fourth quarter last year, overall, the revenue was down. Was it Grand Cereals that struggled a lot? And can you maybe just give some background into why it struggled so much, if I'm just looking at these top line numbers from fourth quarter to first quarter this year? And then the second question relates to -- just to the UPDC REIT business. A little while ago, we spoke about that, and there were some options besides doing an unbundling was to consider selling assets within the REIT business. Is that off the table now, given that the unbundling for UPDC REIT is probably -- probably very closing to being done? Those are the 2 questions I have.

I think on the first one, the Animal Feeds business has a fair amount of seasonality. So comparing the fourth quarter with the first quarter is not really comparable, whether it's Livestock Feeds or Grand Cereals, you see a significant reduction. And this is because the peak periods for the underlying markets we sell into are Christmas. So the disproportionate amount of revenue that is made in the fourth quarter. So I wouldn't really compare Q4 and Q1. If you look at the trends and for us, longer, I've looked, you would always see a big reduction in Q1 from Q4. UPDC REIT, I think it's important to talk about the stocks and governments. We do not manage the REIT, whereas the fund manager [indiscernible] manages the REIT and that fund manager takes decisions around selling underlying assets or buying underlying assets. What we do control is what we do with high units in the REIT. Our plan today is to unbond all those units from UPDC to UAC and from UAC to UAC shareholders. If anything happened, if an offer came by, the result, we create greater value for UAC shareholders, we'll consider it. But the plan we have that is within our control, that we welcome today is the unbundling and we will reassess if something in that we thought could create quicker value.

Your next question is from [indiscernible].

I have some questions, if I may. My first question is regarding the borders closure. What was the impact that it had on your Foods business? And how are you seeing the informal market performing after the borders closure and especially, after the evaluation? My second question is regarding your return on invested capital. I remember, the last time we spoke that your focus was on return on invested capital. But when I look at the numbers, only the Paints business is delivering return on invested capital, that covers the WACC. Do you have any time line when you expect most of your businesses to start delivering more decent returns? And if you have considered closing or selling any of your businesses, especially after the coronavirus? My third question is regarding the personnel costs. If you can give us a guidance how much personnel costs have increased over the last year? And if we can expect any more changes in terms of your top management teams in the coming months? Or this is the management team that we should expect to continue over the next years? And the fourth question would be in terms of the Food businesses, which are the main raw materials that you import? And the fifth question, sorry. Where do you expect your OpEx as a percentage of sales to stabilize in the medium term.

Thank you for those questions. I think, your first question had to do with border closure and impact, particularly, on the Food business. And I would just take the Feeds and Food business under the same umbrella. For the Feeds business, we expected the border closure to be beneficial for 2 reasons. One, we expected there to be less competition from imported [ underline ] poultry, and we're expected that to be an increased focus on the -- on domestic supply from an agricultural commodities perspective. What we see, we felt the market ease in last year then Animal Feeds these markets eased in last year. And so perhaps this piece is for the Packaged Foods business, the impact was slightly negative. We saw uptick in certain raw materials, things like coconut or coconut chips, but not sufficient to -- that company succeeded in growing its margins quite strongly last year, but nothing sufficient to change the overall picture. So I'd say, net-net, it was positive for our businesses, given the impact it had on the Animal Feeds space that we saw come through in terms of an easing in the sector. Informal markets and devaluation, we think that the -- a thesis that we have is -- I don't see how -- we don't think the devaluation would directly impact informal market in any unique way versus to drive up the cost of most products, but we don't see how it impacts the informal market in any particular way. We do feel that people -- that the social distancing and worry about the pandemic is going to influence people's behaviors. And we think there'll be subtle shift, where people avoid situations that they feel may not be as hygienic as I'm going into more formal markets. And so what we found, during the lockdown, in particular, was that the efforts we made at building out a distribution towards neighborhood stores and slightly more semiformal distribution paid off, in terms of supporting our revenue and volume growth during that time period. ROIC, we've maintained an overall 25% target. You're 100% correct that only the Paints business is above that target. But if you look at the spectrum, you know that UPDC is far below and we've concluded, doesn't fit within the Group. The Logistics and Packaged Foods business are much closer and the Feeds business is much further. We feel that for the Logistics and the Packaged Foods business, if we continue their trajectory in terms of growing the operating profitability of those businesses without significantly expanding the invested capital base, the only path towards attaining these targets. But the Feeds business, that is the one where we feel that we need to take structural decisions in terms of capacity in that business, see where that takes us to and then reassess whether we feel that, that is going to create a path toward attaining the target or not. But it's very difficult for me at this time to say that this is going to occur by date X. I will say that we are trying to address the issues relating to structure and issues relating to people over the course of the year. That's our key focus for this year. Personnel cost growth was the key driver of operating cost growth. So the operating cost grew just under 30% and the biggest driver there -- or a big driver there was personnel costs, along with marketing and distribution. The top management teams of the businesses are largely in place. We have new CEOs for Grand Cereals, CAP, Portland Paints, and UAC Foods. There may be 1 or 2 changes that come, but there would not be significant changes that come. Will these teams be in place over the next few years? I hope so, but it's going to be very much dependent on performance, on how they perform. In terms of imported raw materials, the Foods business, that's UAC Foods, doesn't directly import any raw materials, but it procures raw materials from large domestic players that have significant import components in their supply chains, for example, use a lot of flour and there's important wheat, use sugar that's imported raw sugar. And so this will be the big -- and then vegetable oil, will be the big components of COGS, that have an imported component. In the Animal Foods business, I'll say about 20% of the COGS mix is imported under the additives unlike [ rice ] and [indiscernible] and peanuts that we import for those businesses. Where do we expect OpEx of our sales to suffer? I think, we're at 17% currently. We would like to get that well way below 15%. But I think, there are 2 ways of achieving this. I think, in the past, we did this by very tight cost control. We do not feel that, that glide part was sustainable. And so we're going to try to attain this by stabilizing the cost structure, and we feel we're close to stabilizing the cost structure and driving profitable revenue growth. So I think those were the questions from you that I noted down.

Your next question is from [ Deepak Tolani ].

I have a clarification and a question. On Page 18 and 19, you mentioned the debt carried on the real estate business. There's a NGN 16 billion bridge finance loan from the Holdco. How long is that? What is the nature of that debt? Is that debt, that is to -- under the Holdco structure? Are you liable for it? And also on that leverage position, in December 2019, you said it's 0.5, in March 2020, it's 4x. I'm assuming that, that EBITDA is just for Q1? That's my clarification question. And the question I have is like you mentioned earlier that as your inventory is been replenished, the Naira impact will happen on. What level of Naira are you currently accessing in the market to replenish your inventory? What is the level of Naira?

So I think, Deepak, your first question was about UPDC's bridge loan. I think it's important to note that, that bridge loan came from UAC. So when you ask if the Group is -- has sort of guaranteed that loan, the loan is actually from UAC to UPDC. The background to that was UPDC had a short-term debt, roughly core to the quantum of the bridge loan. And UAC had guaranteed a portion of that short-term debt. And what we found was that the debt was very expensive, incurring interest of close to NGN 4 billion a year. And UPDC was depleting these assets to meet interest, leaving the principal outstanding. The concern was, at some point, the pace of asset depletion will be such that there'll be insufficient assets to meet interest and then and UAC's guaranteed to be called to meet the short-term obligations with nothing to underpin that outlook from UAC. So what UAC did was ahead of the rights issue, stepped in and provided the bridge loans, secured the bridge loan against assets. And that bridge loan has now been largely repaid from the conversion in the rights issue. So I hope that clarifies the point. In terms of sourcing Naira at the REIT as you know, there are a number of windows that the SME window and then there is the I&E window. So I'll say the range is between [ 360 ] and [ 390 ] at the upper end. And that is, as of today. We are -- the issue that we find in -- as we move from sticking to other corporate availability. So the rate is where it is, but we seldom get what we did for at least in the -- from the CBN and the RME in matter of matching marketing rate and procuring, but the reduced liquidity there as well, but bidding from the CBN, we seldom get everything we ask about. And you're correct in terms of the leverage calculation .

Your next question is from [indiscernible].

So I've got about 3 questions. So the first is, you mentioned during the earlier part of the presentation that your Group had to take mark-to-market loss of about NGN 2.6 billion. So my presumption is that, in 2019, when the real estate business was classified as discontinued operations, we just see one of mark-to-market loss from UPDC REIT. But of course, it featured again in Q1 2020. So can you provide more color on that? And in addition, is that a recurring change that you would see pending the completion of the bundling exercise. So let me, for instance, by H1 2020, your bundling exercise has not been concluded. Should we expect further mark-to-market loss from UPDC as a result of between payments on investments continued in UPDC REIT? Then secondly, can you provide the time line on when your bundling exercises would be concluded? Then lastly, you mentioned that the Paints business has AI exposure to unfavorable movement in exchange rates, does on a competitive basis now to other business segment. So can you provide an insight on the proportion of raw material that is imported across the various business segments. I think, I picked that of Animal Feeds, but it would be nice if you can just provide figures for the other business segments as well.

Okay. Your first question had to do with UPDC's impact on Q1 and whether this is a recurring trend? Now as -- until the unbundling is complete, UPDC will continue to be accounted for UAC books. The difference is that it accounted for as a discontinued operation, not fully consolidated. So UPDC will continue to color our performance -- not our performance on continuing [ operations ], until the unbonding is complete. What I think is important to note is the nature of the current markdown that UPDC because UPDC has announced that it is unbundling the UPDC will refer investment across the REIT, every price movement in the REIT has to be mark-to-market. And I think that in December, the REIT unit price was NGN 4.25 as at end of Q1, it was NGN 3.10. We can have a very long debate about, whether, I think that that fair value is a REIT and not as an investor in the REIT, but we will simply take the movements in the REIT, share price and pass this through UPDC's books and by extension, assets held in our balance sheet, as assets held for distribution that will flow through UAC's books. The time line for completing the unbundling, I can tell you what we are targeting, and I can tell you what the key concerns are around those targets. So we target getting this done around the middle of the year, so early July. But there are a number of important steps that are required to get it done. The first is we require approvals from the Securities and Exchange Commission. Fortunately, the SEC is working remotely even during this -- the unusual times, in which we find ourselves. We also require a court-ordered shareholder meeting, which means that we need to get this transition from the courts to convene the meeting. And we need to, somehow, convene a shareholder meeting. Now the courts are testing remote sitting, but we'll see how that pans out. And the guidelines from the [ CEC ] conducting general meetings currently do not allow for any, what I call, nonordinary business. So these are 2 reasonably significant hurdles we need to work through that may affect the time line, but we continue to work on those. In terms of imported raw material component, I would say Paints is over 80%, although, one of the key initiatives we are working on the Paints business is to improve the proportion of value addition in country. It's a big initiative we're working on in that business. Packaged Foods, 0 direct imports, but I would say imports exposure of roughly about 50% of cost of sales. Animal Feeds, I would say will be below 25%. So Paints north of 80%, Packaged Foods around 50% and Animal Feeds, I'd say 25% although, I'm a [indiscernible], but Animal Feeds does consume agricultural commodities, which are sensitive to the Naira-Dollar Exchange Rate, although, not imported.

Your final question is from [ Abdul Rauf Belo ].

Okay. So in your Q1 '20 result and particularly already about the operating profit decline of many of your business segments. So the Animal Feeds went down by 60%. The Paints business 21%. So yes, the Packaged Foods business grew. So -- and [ individuals ] also [ well ] for me is the Paints business that, I believe, is the major profit driver of the Group. So in full year '19, it went down 14%. And then in Q1 '20, we've seen a 21% decline. So I just want to have a bit of understanding around what happened along those lines? And my second question is about on the competitive position of the subsidiaries across materials market, where the competitive position at the moment? And also, the top question is about if there is any concentration risk across any of your business segment?

Okay. I think your first question has to do with operating expense growth and its impact on operating profit. As I mentioned, we are laser focused on this. We are laser focused, and the operating expense growth are investments for growth. Now I think, in the Paints business, we are comfortable about the position. I think if you look at the underlying, if you look at 2019, the operating profit was down almost double digit. If I look at Q1, CAP grew it's revenues 10%, gross profit 15% and had reduced the OpEx -- the EBIT reduction to 3.5%. Portland Paints had a rough Q1 for reasons that we're familiar with. There's been a management change there, and we are putting in place some initiatives to reverse that trend. In summary, there was a disproportionate focus on the oil and gas and marines segment of the business going into what has been a slowdown in that particular -- in the underlying end market. So we are comfortable with the trend we are seeing in the Paints business. Our focus is on growing the top line of that business. And we've made a few one-off investments. So we're confident that the growth is going to catch up. Now obviously, the impact of COVID will slow down the momentum that we are seeing, but we're confident about our strategy in that particular business. Competitive position of our businesses, I think, it's one that gives us comfort. In the Paints business, we are the -- by far, the leader in the premium space and a leader in the standard space. We do not play in the value space. So we have a very strong competitive position in Paints. We have a strong competitive position in Logistics. I'll say, we're the leading integrated provider of warehousing and distribution in the country. In Packaged Foods we're the leader in the long life [indiscernible] market and are aggressively investing in leveraging this strength by launching other products, other snack products. We're #2 in the dairy business, although, we've seen decent growth there, unless we were before the impact of COVID. And in Animal Feeds, we have a good competitive position. There are 3 very big players, ourselves, Animal Feeds and Animal [indiscernible]. So I think we are comfortable with our competitive position. I think we're very strong in certain areas. We face strong competition, but there's no -- I have no concern around any significant advantage any player in any of our segments has of our companies in our Group. And I do not believe we face any significant concentration risk in any of operating segments.

That concludes the Q&A session. I would now like to hand the call back to Mr. Folasope Aiyesimoju, Group Managing Director, for any closing remarks. Thank you.

And I'll just say thank you, once again, for hosting the call. I'd like to thank everyone for joining. I wish us continued health over the course of the year. And I will say that we are very aware that we have moved into unusual times, and we continue to assess, on a granular level, the health of each of our businesses. We're also cognizant that there is going to be a post-crisis economy. The world isn't going to come to an end. And to ensure that we do not overweight our focus on managing through the crisis, I mentioned that we retain sufficient weighting to planning for growth in what the new normal will look like. And with that, I thank everyone and wish you a wonderful rest of the day.

Thank you very much. That concludes the UAC of Nigeria Full Year 2019 and First Quarter 2020 Results Conference Call. You may now hang up. Thank you.