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

Good morning, and good afternoon, ladies and gentlemen, and welcome to the UAC of Nigeria Half Year 2020 Results Conference Call. The 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. Please go ahead, sir.

Thank you, Tay. Good day, and welcome to our results presentation for the first half of 2020. My name is Folasope Aiyesimoju, and with me today are Kunle Oriola, our Group Finance Director; and Funke Ijaiya-Oladipo who heads Investor Relations. I hope that you and your loved ones are safe and healthy, and thank you for making time to join us today. As we have done in previous sessions, I will aim to go through prepared remarks in 15 to 20 minutes, leaving sufficient time for Q&A. In addition to providing insight regarding our performance for the half year, I will also discuss the recently announced partnership between Custodian Investment, Plc and UAC as regards UPDC. I will now ask you to turn to Slide 5. As we are all acutely aware, Nigeria, along with the rest of the world, continues to grapple with the impact of COVID-19, which has negatively impacted the operating landscape. As you are no doubt familiar with the macroeconomic indicators, I will focus on key takeaways, which are that we expect economic contraction, rising inflation and challenges with foreign exchange availability and rates. Please turn to Slide 6. Here, we focus on the impact of the economic landscape on our businesses, and we have just impact depending on where businesses lie on what we consider the essential spectrum. At one end and least affected from a top line perspective, we have our Animal Feeds & edible oils businesses, considered essential. And on the other hand, we have the Quick Service Restaurant business, considered more nonessential. In between, we have the Packaged Food and Beverages, Logistics and Paints businesses for which the impact has been mixed. For example, our water business has performed strongly and beyond the go-snacks business less so, particularly in April, during the more stringent phase of physical distancing in Nigeria. In the QSR business, in-store dining has declined and delivery has increased. Our focus is on delivering performance in spite of tough operating conditions. Achieving this will require overcoming a number of significant headwinds, including reduced aggregate demand and increased competitive intensity; rising input costs with supplier's site in the foreign exchange environment; global supply chain disruptions, which have impacted production in certain segments; and we have experienced project delays on account of travel restrictions and challenges in shipping plant and equipment. On Slide 7, we highlight our continued focus on ensuring the health and safety of our employees and stakeholders, improving the resilience of our operations and ensuring business continuity, acting as responsible corporate citizens, giving back to those most vulnerable in our communities and critically focusing on opportunities for growth in spite of challenging conditions. May I please ask that you turn to Slide 9, which provides insight regarding our recently announced partnership with Custodian Investment Plc. Last year, we indicated the intention to unbundle our interest in UPDC to our shareholders with the key motivation being the differences between UPDC and the rest of our operating segments. Over the course of implementing the planned unbundling, we entered discussions with Custodian, the conclusion of which we assessed relative to the proposed unbundling. Discussions led to UAC and Custodian executing binding agreements for Custodian to acquire a 51% interest in UPDC at a price per share of NGN 82.5, with 85% of consideration payable immediately on closing and the balance upon certain conditions. We determined that the transaction with Custodian presents superior value to the unbundling for 3 primary reasons. Firstly, UAC crystalizes cash proceeds. Secondly, we achieved our strategic objectives. And finally, we received units in the UPDC reach, which is profitable, cash-generative with potential future upside. Also of significance is that UPDC benefits from the introduction of a strong anchor shareholder, which improves its prospects for future value creation, from which UAC will benefit by its retained stake. As of June 30, we carried our stake in UPDC at a value of NGN 17.2 billion. The transaction value has taken UPDC at NGN 14.4 billion, including the deferred contribution component, but we will also receive units in the UPDC REIT worth NGN 2.5 billion at yesterday's prices, bringing total value to UAC of NGN 17 billion. I will now ask you to turn to Slide 11, which summarizes our financial performance. As I mentioned on the full year 2019 earnings call, we sold a controlling interest in MDS to our partners, Imperial Logistics, and as such, MDS is no longer consolidated with our numbers. We adjust 2019 financials to exclude MDS for ease of comparison. Results for the half year were disappointing with operating profit down almost 70%. Performance was impacted by two primary factors: COVID-related disruptions to sales and by extent on gross profit, and increased operating expenses as we made necessary investments for growth. Revenues for the half year were down 2% relative to 2019, significantly impacted by results for the month of April when revenues declined relative to April 2019 by more than 30%, and we recorded an operating loss for the month of NGN 500 million. It's important to remember that this was the most stringent phase of physical distancing in Nigeria, in which performance was dependent on government approvals for the operation of factories and movement of people and goods. The 8% decline in gross profit and 130-basis-point reduction in gross margin was also largely on a counter performance in the month of April, which gross profit declined by about 50% and gross margin was down 500 basis points. In spite of the challenges in April, our Animal Feeds & Edible Oils business and Packaged Food and Beverage business recorded similar levels of revenue and maintained gross margin relative to 2019 over the course of the half year, indicating resilience and recovery in the months of May and June. Our Paints business, which was hardest hit due to the production restrictions and supply chain disruptions in April, recorded a 20% decline in H1 2020 revenues and gross profit, relative to the same period in 2019. Again, the decline here can largely be isolated to the impact of the month of April. The Quick Service Restaurant business faced restrictions to [ operations ] and recorded negative performance over the period. Overall, we acknowledge there's a lot of work to do to deliver good aspirations, but I'm encouraged by recovery following the more stringent phase of physical distancing, even when we faced challenging but necessary restrictions to our ability to operate as governments took aggressive measures to restrict the spread of COVID-19. I will now ask you to turn to Slide 12. We are conscious that our investments to drive growth resulted in more than NGN 1 billion increase in operating expenses, largely in the Animal & Edible Oils and Packaged Food and Beverage businesses but some context is required regarding this increase. NGN 300 million of costs are one-off and related to redundancies and COVID-19-related expenditure. A further NGN 170 million is attributable to increased depreciation from investments in distribution infrastructure, repurchased bonds and core chain infrastructure in the Packaged Foods business. There was a NGN 230 million increase in distribution expenses in the Animal Feeds business, and this represents a 35% increase on similar volumes over the same period last year. We expect this trend to reverse with the unit cost of freight declining. Overall, there is more than NGN 800 million in noncash or nonrecurring costs. We have made investments in talent, sales and distribution, which have increased our recurring cost base, and we are paying close attention to driving returns on these investments. The chart on this slide aims to contextualize the key factors that negatively impacted our performance in the half year. I have addressed pieces on detail already, and the summary is that operating profit declined NGN 1.8 billion from NGN 2.6 billion in H1 2019 to NGN 800 million for the first half ended June 2020. Of this, NGN 400 million is attributable to lost sales in the Paints segment in the month of April and a further NGN 800 million in noncash and one-off costs. We are focused on leveraging our recent investments to drive top line growth, which we expect to result in earnings growth. On Slide 13, we provide background regarding our [indiscernible] segments. I have talked a bit about the financial performance of the Animal Feeds business. A key focus, however, over the period was on tight inventory control, which resulted in cash generation to reduce leverage. In this segment, our focus going forward is on expanding our coverage to grow volumes. The Packaged Foods business saw the sharpest increase in costs, and this is a subject of our focus going forward. We also continue to grow our water and ice cream segments, making necessary investments in capacity chain distribution. The Paints business, which was deemed nonessential in the month of April, was hardest hit by the physical-distancing initiatives. We have seen recovery in the month of May and June and continued to focus on growing volumes in the segment, and unlocking the supply chain disruptions that have also impacted sales. In the QSR business, we are driving delivery, leveraging investments in corporate stores. Our Logistics business grew on account of recent investments in the haulage segment, which we intend to leverage going forward. We continue to work with our partners, Imperial, on expanding our service offering. I have already discussed the recently announced strategic initiatives regarding our Real Estate business. The focus here is on completing the execution of this initiative, and the business will focus on liquidating low-yielding assets to return cash to investors, delivering development with sound risk-adjusted returns and growing the facilities management business. I will kindly ask that you turn to Slide 14, which highlights aspect of our balance sheet. We continue to have a healthy cash position of NGN 21 billion, and the focus over the course of the half year, as I mentioned, has been on liquidity. We reduced inventory by NGN 3 billion and utilized proceeds to settle short-term debt obligations. We have no long-term debt in our subsidiaries on continued operations. MDS does have the free financing line and UPDC outstanding bond obligations. Capital expenditure in the period was largely concentrated in the Packaged Foods segment where we made and will continue to make investments to address inadequate capacity. On Slide 15, we summarized the cash position within the group, which as I mentioned is NGN 21 billion. NGN 8.4 billion of this cash is held at the holding company, and the rest are subsidiaries. In addition to cash, we hold a further NGN 3 billion in bonds at the holdco. On Slide 17 and in conclusion. We are conscious that the economic outlook is significantly worse than what we envisaged at the beginning of the year, largely on account of COVID-19 and its far-reaching impact. We remain focused on our priorities, which include completing the sale of UPDC, which will increase our cash position initially by up to NGN 6.6 billion, potentially rising to NGN 7.8 billion; introduce a strong strategic partner of our Real Estate business; and enable us to achieve our strategic objectives. We will continue with the unbundling of the UPDC REIT, with UAC expected to receive 650 million units, about NGN 2.5 billion. We aim to deliver growth in spite of the economic outlook by focusing on efficiencies and serving our customers. We will pay close attention to costs sitting to a limited duplication and waste without compromising growth. Key initiatives we're embarking on include a refresh of our enterprise resource planning system and migration to a cloud-based IT platform. Both of these will entail one-off investments but yield long-term benefits. Underpinning our efforts is our commitment to attracting and retaining the strongest possible management teams. I thank you once again for participating in the session today, and we will now take questions.

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

Fola, just a few questions. The first one, Livestock Feeds used to be like this [indiscernible] business, seems to be doing well lately. But from what I'm seeing, sales from all the regional [indiscernible] nationwide, except for [indiscernible]. And then Grand Cereal, which used to be like an outperformer, seems to be struggling [indiscernible]. Can you like explain what's changed? What exactly are the specific challenges [ fit ] by Grand Cereal? And what is -- what exactly is driving Livestock Feeds? Second question, in light of the cash received from both MDS and UPDC, could you give side, also dividend? Should we still expect a conservative stance similar to last year or something more aggressive? Or are we likely to see 0 EBITDA, given the COVID environment? Also, post-H1, what's the reason as the environment being like -- given the partial relaxation of the lockdown? I know you said April was stringent. What are you seeing recently out there? Finally, has there been any improvement on your part in sourcing FX? Or do you use to experience unusual delays in filling your orders? Those are my questions.

Thank you, Fola. If I recap your questions, I think the first is you comment on the strong performance of LSF. Relative to Grand Cereals, you asked about plans for cash uses from MDS and UPDC; views on position, business performance and experience sourcing FX. Livestock Feeds and Grand Cereals are very similar businesses that have different geographic focus and a few nuances in terms of target customers. Both management teams have a reasonably similar strategy as regard to the Animal Feeds segment. But as you know, Grand Cereals has a reasonably sizable edible segment. They both focused on increasing their coverage to larger farms. And if you ask me from where I sit, the primary difference is that the management team at LSF is more established. And if I look at the progression of performance in Grand Cereals, I very much expect that we will start seeing similar performance to that, which is recorded in LSF. Grand Cereals have [indiscernible] a little bit because it's more northern-fishing business than Livestock Feed, but I think this should be adjusted as Grand Cereals team shuttles in the most. Remember that the management team of that company was recruited between September and March of this year. Cash from MDS and UPDC. I think we'll recall that our cash reserves are significantly depleted by the investment in UPDC, and we received some cash. Our dividend policy has not changed. We assess our investment needs and determine a dividend policy based on those investment needs. Specifically, as regards to COVID and a conservative or a more conservative stance this year. In planning for COVID, and we were making this plan, you must remember, in February and March, we expected -- we planned for the worst, and I would say in every single one of our businesses, they performed much more strongly than expectations. And we felt that we had to be [indiscernible] to respond, no matter how bad things got in any of our businesses. And to achieve this, we felt that it was important for the group to maintain as much strategic flexibility as possible and as much liquidity as possible. So I will say that as the impact of COVID unwind, we will go back to a more normal dividend regime where we assess investment needs and distribute based on those. But that's just a very [indiscernible] part of the other specific regions that made us significantly reduce our dividend for this year. It was in planning for the worst, and we had no idea how bad things could get when we were making this stance back in February or March. Post-April business performance and post-H1, we've seen a good recovery across all our segments, and that has continued into July. If I have any concern around the businesses, and I try to think about these things in 2 components, top line and then margin, it is tied to your next question, which is FX. We acknowledge the CBN's efforts to try to prioritize FX to manufacturing concerns. There's still delays in sourcing but with money to get by. But the rates at which the naira settles, when it does settle, I think it certainly will impact the margin component of your question. So we've seen good recovery top line. And so far, it's very slow, but we do get the FX, and I should stress very slow, depending on where it settled, that would impact the margin component of the outlook. I hope those address your questions, Fola.

Your next question is from Danesh Ranchhod from Franklin Templeton.

I've got 2 questions. The one question just relates to the UPDC sale to Custodian. So I'm just -- if I'm not mistaken, I didn't quite catch what that sort of sale price was for the 51% stake. And then the second question was some numbers in the presentation refers to UPDC REIT still being unbundled. So will that still be unbundled to UAC shareholders?

Thank you, Danesh. If I caught your 2 questions correctly, the first was the sale price of the 51% stake to Custodian, and the second was the plan for UPDC REIT. The sale price is NGN 82.5, of which 85% is stable even if it's roughly NGN 80 roughly completion, and the rest based on attainment of setting conditions is a negative performance. And the -- and UPDC intends to continue with the unbundling of the REIT. And just based on shareholder records, those units with initiative flow to UAC. It is UAC's intention to unbundle those units to its shareholders. But as we've seen with the Custodian sale, which was not in our contemplation at the time we announced the unbundling of UPDC, we will assess all and any opportunities that come our way until the [ deposits ] are bundled.

Your next question is from [ Michael Yule ] from Stanbic Pensions.

So my question is around -- first of all, I didn't quite get what you said about the proceeds of the sale vis-à-vis the -- what are you going to recognize a loss. So just to confirm, are you saying that the proceeds of the sale is structured in such amount that the current costs and the proceeds would -- there will be no net loss position, and at the conclusion, you will still own some percentage of US -- UPDC? That's my first question. My second question is also correlated to that. As in can you share with us some of those conditions that would be met for -- from [indiscernible]? And then -- and that was referring to the fact that when do we expect the deconsolidation? Is it going to be deconsolidated from H1 from -- this is going to be the last quarter of deconsolidation? And then the final question is on EBIT. So how do you see EBIT evolving? Do you think we are through the worst? Or do you think that the worst is yet to come? How do you see that evolving?

Thank you, [ Michael ]. I think you are seeking clarity around 2 numbers, carrying value versus value received. And if I heard you correctly, clarity around conditions, the consolidation of UPDC and retirement thereon, and evolution of EBIT. The fourth one is the longest [indiscernible]. I'll pick the first 3 first. The carrying value is NGN 17.2 billion, value received by UAC is NGN 17 billion, so there a small delta there. However, anyone who saw the market is that our retained stake would already be more valuable given what has happened to UPDC share price. Conditions -- I think, to completion, regulatory approval and for additional contribution, certain asset performance, which I cannot -- I wouldn't delve into now but certain -- the performance of certain discrete assets. Deconsolidation will occur based on completion. So as soon as we get regulatory approval, then we complete the trade of the sale of 51%. We will no longer control UPDC, and therefore, the company will be deconsolidated. The timing is dependent on the speed of regulatory approvals. I very much expect it to be done this year, but I am very cautious about committing to things that are not entirely within our control. Now as regards EBIT performance. I would almost sort of respond in 2 layers. So I think the color, historically regarding our EBIT, was we made these big investments in OpEx and when is the revenue performance going to come. Now as I've hopefully articulated, it is a one-off step changes. So they're not going to be continuous one-off increases. So they're one-off increases from '19 to '20. And so I very much expect that as we start seeing numbers into the next financial year because these are one-off step changes in operating costs as revenue growth catches up, we'll start seeing these through to EBIT growth. The only caveat I will give in that is the big concern we have around the outlook is the rate of FX and its impact on input costs. And that's very difficult to forecast. If things stay a little bit the way they are, we're a lot less -- when things deteriorate, we're a lot more concerned. So in summary, excluding the potential FX impact, we very much expect as we go into the next financial year and the impact of this one-off step changes no longer recur. We start seeing EBIT performance. And the big question mark we have around the outlook has to do with the levels at which the FX settles.

The next question is from of [indiscernible] from WSTC Financial Services.

My question is on the Animal Feeds business segment. I have a couple of questions, this is the first of them. So in Slide 6, you gave a graphical presentation as to the sectors or the business segments that were mostly [indiscernible], I would expect that the Animal Feeds business segment would perform strongly. But I realized that in Q2, it declined, and I'd like to have an understanding as to one less decline and what the problem was in Q2. So I know you mentioned something around use of proceeds from the sale of equities taken UPDC, but I didn't really get it clearly. So outlook for dividend. So do shareholders expect anything? Like I had the part where you said you prepared for the worst at the initial stage of the pandemic, but you also mentioned that already, you're beginning to see recovery. And going forward, at the end of the year, what should we expect? Do we expect to see a special dividend even? Or what the first initiative would be like? So concerning the UPDC divestment. So a bit of concern from my end is that in Q1, when we -- when the management spoke to him, analyst, so one of the things considered was a persistent loss-making nature of the UPDC business and the weak macroeconomic outlook. And was part of the thing is the management considered to spin that business segment off. And now the narrative has changed now, and the scope has changed. But even if the business is going to divest as much as 51% from its existing 93%, the book will -- the company or the group will still recurring 43% in its books, maybe on the mind of the income statement. So I don't know. What's the plan for growth in the UPDC business? Or what's the turnaround strategy going to be like such that the losses or whatever losses that will be incurred here would not significantly impact the group's book such that profitability would be lower? So -- and yes, those are my questions.

Okay. Thanks, [indiscernible]. I think I got 3 questions. One is why did Animal Feeds decline in Q2, given that it's essential. Two is, I think still seeking clarity around dividend, the use of proceeds. And I think there's almost a 3a and 3b, which is some concern around UPDC being loss-making -- maybe 3a, b and c. UPDC loss-making, why retain a stake strategy for UPDC going forward and impact of UPDC on UAC's books. So I think the first one is easy. Animal Feeds did not decline in Q2. I think if you turn to the very end of the presentation, I think it's Slide 25, we showed their performance for Q2. So Animal Feeds, as you rightly point out, I'd like to do but chickens don't. Fact is very essential, as long as farmers have bird food, they do what they can to feed those birds. So the Animal Feeds business didn't decline the top line in Q2. UPDC use of proceeds, I think I've mentioned 2 things. One, we do not have any present plans for a special dividend. What I have said is that the very conservative dividend spend we took this year is, all things being equal, going to reverse as we go going forward because the strategic flexibility that we decided to give ourselves going into the lockdown and COVID impact, we are increasingly getting comfortable that we can begin to be strict. As regards UPDC, I would say 2 things. First of all, the plan was to unbundle UPDC to UAC shareholders. And we obviously wouldn't have sought to do that without significantly strengthening the business. And we wouldn't handle by problem to our shareholders. And a lot of work has been done at UPDC over the last few years, in terms of turning the management team aggressively, structuring costs, and the [indiscernible] book. And typically, on your last question, focusing on the strategy. UPDC is going to focus on doing only 3 things going forward: one is realize low-yielded assets and return cash to investors; two, focus on very disciplined risk-adjusted -- with a very disciplined investments with good risk-adjusted returns; and three, aggressively grow our facilities management business, which is an attractive business that has no invested capital. Those are 3 things UPDC is going to focus on. And the work required to position the company to focus on those things has been done. And so together with our partners, Custodian, we expect to drive the performance of these 3 initiatives. UPDC will be held as an associate on new issues books. The share of profit or loss would flow through our books. But the intention, like I said, very much is to drive on these 3 value-creation initiative, such as the significant negative impact and UPDC used to have on UAC's books become the thing of the past. So that's the thinking around the UPDC. And I hope that I answered the questions 1, 2, 3 to c.

Your next question is from Wale Okunrinboye from Sigma Pensions.

I think one of my questions has been answered, which was on the unbundling. The other question I have is on your margin. So looking across all the source division, I think maybe if I could have some form of, I don't know, a line of sight over where do you see your Animal Feeds business, the operating margins stay stabilizing at? And how do you think you can get it? Where do you think you did more? So if the environment is more stable, less not too much net valuation, see maybe something 3%, 5%. Where do you see your Animal Feed margins stabilizing at? And then my second question is on your Packaged Foods and QSR businesses. What's the plan for these businesses? Maybe you can talk us what's the plan you have in terms of driving improvement in performance at these businesses as a more sustainable level. Is this something you see that you can do? Or is it something that maybe you are going to also look to go down the way of disposals or reducing your holdings there if it's that? And then I think lastly is just more and more UAC and for a long time. The pressure had always been about the Real Estate business that was struggling. Now you've been able to go past that. I think maybe it's more to catch what the outlook you think would be for UAC going forward. Where do you see value coming from the business going forward? Yes, that will be all.

Thank you very much, Wale. I was hoping you will say I told you so, because I recall when we announced the unbundling, I think you had asked why we didn't show the company. So I was hoping you will start off with an "I told you so." But anyhow, back to your questions. I think Animal Feeds -- I'd like to think about margin in 2 separate components: the gross margin and the operating margin. And the business' gross margins held up in spite of COVID year-on-year. So we don't have any concern there. If anything, we see an increase in the gross margins because at Grand Cereals, in particular, there's an increased focus on the higher-margin segments. So that's the edible segment. So they held up already. So we didn't see -- and you rightly pointed out, FX aside, and we expect, if anything, to see an improvement there. The EBIT margin, as I explained, we had this one-off cost increases. And as the revenue growth catches up because we don't plan to keep on adding this cost year-on-year, we will begin to see growth in the EBIT margin. I am very hesitant to give you a date and a number. As regards Packaged Foods. We have no present intention of divesting this business. But I cannot stress another as a management in review as well as Custodian's shareholder value. So we would -- in assessing any situation, ask ourselves what is the best interest of our shareholders. Our plan there is very simple. There are 3 segments within the Animal Feeds business. Snacks, this is Gala, Funtime Coconut Chips and Funtime Cupcakes. There is dairy, and there is water. In the water business, we cannot meet capacity. So it's quite a simple set of objectives, grow capacity to expand in that business. In the dairy business, we, as you know, had until last year, recorded losses and sometimes, quite significant but they have been fixed. It's very profitable, the highest-margin business within the Foods business, and we have made investments to scale that business already. And the Snacks business have identified pockets of underpenetration and are going to focus on growing volume by addressing this pocket of underpenetration in the Snacks business. We also had capacity constraints with our Snacks business in Gala, in particular. We made some changes last year and grew capacity, and we'll continue to assess when we hit the limit of capacity. So we have every intention to maximize what we feel are very, very, very important strengths that business has. It has decades-old, well-established brands and very good distribution, and we plan to leverage this to deliver value. As regards Real Estate. I think I've touched a little bit about our focus for value creation. If you look at UPDC's balance sheet, we have still a significant asset base, but the yield we get on those assets are not attractive. And so the focus is very much to realize those low-yielding assets. We will use some of this capital to fund development and the first development we're already working on now, should get going later this year, in a very disciplined fashion, and we can go into some detail about what that discipline looks like and return excess cash from the asset realizations to -- initially to redeem the remaining NGN 4 billion obligations and then eventually to stakeholders. And we plan to aggressively grow our facilities management business. It's a very focused strategy for value creation at UPDC going forward. And we think the work has been done. I think when we roadshowed for the right issue, and we met your colleagues and yourself, you would have had a first-time engagement with the management team that has been put in place at UPDC, if you finished, is very capable of delivering on these value-creation initiatives.

Your next question is from Efemena Esalomi from SBG Securities.

If I could just circle back to the last question on the Packaged Food business and the QSR business. And maybe if you could just speak a little bit about your relationship with the JV partners in that business. You mentioned that there's no plan for divestment. But maybe beyond what you've spoken about with increasing capacity for Gala and what would be something more strategic long-term. Also for the Curaçao businesses. I think we've spoken in the past about investments and expansion of some of the brands in that business. So if you could just speak to that. Also on EBIT margin and EBIT margin outlook for the business, I think you focused on FX being sort of one of the major drivers. So if you could speak to how FX impacts the different businesses, maybe give a percentage exposure to FX across the different businesses. And then for Animal Feeds. You spoke to improve margins, especially for Grand Cereals, from focusing on more of your Edibles business. So if you could just provide a split for between poultry, fish and in the Edible business for Animal Feeds. Those are my questions.

Thank you very much, Efemena. If I try to sort of summarize your questions, you asked, I think, 2 questions around Packaged Food and QSR. You asked about strategy, and you also asked about relationship with our JV partners. You asked about the impact of FX on -- you commented that FX was a driver for our protein profit margins. And you asked about the impact about the FX component in our businesses. And I think, finally, the mix of business between feeds and edibles in the Animal Feeds businesses. If I got those correct, I think we have 2 JV partners, 2 separate JV partners in our Packaged Food business and our QSR business. Our partner in our Packaged Foods business is Tiger Brands. And our partner in our QSR business is Famous Brands. Both partners have very, very senior executives on the Board of the companies and remain very engaged. And there is very, very good alignment between the partners in terms of our strategic direction and value creation. And so we speak with one voice to the management team of this company in terms of delivering outcomes. I've talked a bit about the -- I've gone in some depth about the strategy for the Packaged Foods business, so I would realize that now. And for the QSR business, we have acknowledged that it is soft-scale, loss-making business. And we feel -- and we are taking the time to do the work to figure out what is required to make this a meaningful profitable business. I've touched on 2 of those pillars: one is corporate stores; and the second is ramping up delivery. For corporate stores, we generally try to -- if we have a thesis, we try to test it. So we rolled out 4 of those, and they're all doing very well. Frankly, doing well in spite of COVID and the combination of Mr. Bigg's and Debonairs' collocated pizza and more traditional thing has worked very well. And so the idea will be continue to scale that particular business. As regards to FX in our businesses. I think it was -- Wale, again, who asked this question on our last call. And I think -- so I want to clarify that I have not said that our [ operating ] performance for the half year was on account of FX. I have said that FX is a big concern around the operating margin going forward. I think it's important to clarify that. And I think what we did is that all we can do is look at what happened in the past when we had FX devaluation and we see what happens to our businesses. And I think on this particular one, we can only go back to the 2014, '17 time period. And I think if I look across the businesses, the Animal Feeds was the least impacted by -- from a margin perspective, in that time period. And the Paints business was the most impacted in terms of 6.6% devaluation year-on-year to gross margin. So very enterprising because I want extreme -- the Painting business has the highest imported cost component and the Animal Feeds has a least. And in between, you have the Packaged Food business. So just to summarize, Animal Feeds is the lowest imported raw material component, although agricultural commodities are influenced by global pricing. So although we don't have to actually physically import the goods, it's not completely immune. Paints, which has load of chemical -- imported chemicals and raw materials is the most exposed, and in between, you have the Packaged Foods. And we saw this play out in the last significant cycle of devaluation. So all we can go with is what happened in the past and plan going forward based on what happened in the past. As regards contribution from our -- in the Animal Feeds business from the various segments. From a gross profit perspective, edibles are roughly about 20%, 25%, and feed is the rest, from a gross profit perspective. Feed obviously is a bigger contributor of goods to revenue. But because the edibles are higher margin, we prepare to look at their gross profit contribution. So you could see roughly today 80-20 edibles feed for the Animal Feeds segment, and we expect this to shift as we increasingly focus on the higher-margin segments.

Your next question is from Philip Anegbe of CardinalStone Securities.

Most of my questions have been answered, but I just have about 2 questions on the UPDC and Custodian deal. The first is a lot of us are aware that we put in about NGN 15 billion last year at NGN 1 per share. So why sell, at this NGN 2.5 at this paramount? And secondly, I thought -- it was not very clear, but I thought I heard you explain how the NGN 32.5 will translate to NGN 70. Please, can you provide some clarity on that? Can you like provide some color?

Thank you very much, Philip. I will say 2 things. Yes, we invested in the right issue at NGN 1 a share. And I think I tried to explain in my prepared remarks that we are getting our share of the REIT. We're getting NGN 2.5 billion of value as our share of the REIT for no additional consideration. And when we invested, we invested in UPDC, including the REIT. So I think it's a nuance distinction that should make. The NGN 2.5, immediately upon closing, we get paid 85% of that, which is about NGN 70 a share and they're setting conditions that figure the payment of the balance consideration. So that's the split-up of the contribution payment. I hope that addresses the 2 questions.

Your next question is from Makinde Samuel of WSTC Securities.

My question has actually been answered partially. That is -- my question is at the same time on the binding offer you receive from Custodian. I was wondering why selling at in discount to market. And also, what is the attraction of this transaction to UAC, considering that you did a right issue? And this on what your response now, I need to get clarity around UPDC REIT and UPDC. Is it that you -- the consideration is just for UPDC? So I really need clarification around that.

Okay. I think you have asked 3 questions: why we're setting at a discount; attractiveness of the transaction and what the consideration covers. I think the last one is just restatement of fact. So UAC is selling 51% of UPDC. UAC receives cash proceeds for that 51%, and UAC retains roughly 42% of UPDC. UPDC will proceed with the unbundling of the UPDC REIT. So let us ignore. I think the question has been asked whether UAC would go ahead and unbundle its interest in the UPDC REIT. UAC would own -- would receive cash proceeds from the sale, would have it retained interest in UPDC and would have its unit in the UPDC REIT. The aggregate value of this is NGN 17 billion, our carrying value is NGN 17.2 billion. So yes, there is a small loss there. The deal with the Custodian was a very rigorous negotiation, which I think was fair to both parties. And I think, frankly, the day we announced was actually roughly in line with where market was. But I would like to point out a couple of things. One, the outlook for the world and the pricing of UPDC, I think UPDC was at NGN 1.9. At the time the rights issue was announced just about 6 months ago, it's very different to that, which is now. What I'd like to repeat, carrying value NGN 17.2 billion, value received NGN 17 billion, and so we're roughly square, but yes, there's a small delta there. In terms of the attraction. Again, I went over this in my prepared remarks. We see 3 primary benefits. Firstly, we crystallized cash proceeds to ourselves. Secondly, we introduced a partner that, we have no doubt, strengthens UPDC's outlooks and increases the value creation and future for UPDC. And thirdly, we achieved our strategic initiatives. So those are the reasons that led us to pursue this particular initiative. And I hope those address your questions, Makinde.

Your next question is from Danesh Ranchhod of Franklin Templeton.

Just some follow-up questions to the other parts of the business ex-Real Estate. Just regard the -- in regard the Paints business, just any sort of progress on possible merger between the 2 Paints businesses? That's my first question. And then the second question just comes back to the QSR business, the Quick Service Restaurant business. You've spoken previously about potentially reviewing this, and it's obviously very small in the business, and it's going through a difficult time. Is there any sort of further progress on whether you would look to unbundle it or shut that down or sell the businesses piece more if that can be done? So those are my 2 questions.

Okay. So first question, Danesh, thank you, is any progress on the possible merger between CAP and [indiscernible]. I think [indiscernible] is important, the 2 public companies with their respective Boards, management, shareholders of [indiscernible] fairly significant one. If and when those companies decide to progress with discussions around the merger, we are the controlling shareholder of both, as UAC would clearly lend our voice and exercise our view as regards those initiatives. Speaking purely conceptually, there are pros and cons to the 2 businesses coming together. The pro being just a much larger business on a more efficient cost base. In the interim, we have only one message for the respective management teams at CAP and POP, which is to aggressively focus on value creation. And we would partly express our view if and when those 2 companies decide that it's in the best interest to come together. As regards QSR. We are very close. We haven't come to conclusions yet as regards this business. And as we have a partner in the business, I'm very careful not to begin to frame conclusions that have not been discussed and agreed with our partners. We have made a lot of progress. If I was going to put this in percentage, I think we are more than 85 turned away there. We're very clear what needs to be done. It is not likely to be a surrender, but I would most prefer to have final conclusions at [indiscernible] Partners and then communicate these to our shareholders.

The next question is from [ Polaron Ologunro ] of [ CSO Stockbrockers ].

So Fola, I think virtually, all of my question have been answered, but just a little bit of clarification still as regards in sale of UPDC. So I'm just thinking, can you provide an insight as to the strategic thinking behind sale of stake of 51% as opposed to, let's say, the net 4% held in UPDC that will completely extinguish UPDC from the books. Given that, I think in the past, you've alluded to how the underperformance in that realistic business has constituted a drop on group's performance. So just an insight into the strategic thinking behind sale of 51% as opposed to an outright fill, such that we don't find ourselves in a situation where post-sale of the 51%, we still be consolidating share of loss from associates into the group's books.

Thank you very much, [ Polaron ]. I think the best way to think about the discussions between UAC and Custodian was very much discussed around partnership. Where -- and I've been very careful not to speak on behalf of [indiscernible] and his team at Custodian, where obviously the team at Custodian saw long-term value in the Real Estate sector. And so UPDC has a vehicle through which this could be explored. Custodian is a company that we respect tremendously at UAC. And in the course of those discussions, which are very much framed in partnership, we arrived at this structure, and where Custodian owns 51% and we own 49% was not a case of -- we were, like I said, proceeding with an unbundling. We are not sort of hawking 94% stake and batter down to 51%. It was discussion entered in partnerships between 2 companies that have tremendous respect for each other. Now those discussions and the unbundling wouldn't have occurred if the philosophy and mindset of both parties was that this is a problem. So I'd like to repeat that, yes, UPDC has had a tough couple of years, but a lot of hard work has been on today marks 2 years, actually. It just occur to me now that you asked the question. Today is the second anniversary to the day of my -- going into UPDC as the CEO of that company. And I think the work that has been done has positioned UPDC as a company that begins to exploit value and deliver returns from opportunity that we see in the Real Estate sector. It is not going to be easy. It's not going to be -- suddenly UPDC becomes the most profitable company owned by either Custodian or UAC in the next quarter, but we feel that the hard work has been done to position the company to deliver value over the long run.

Your final question is from Makinde Samuel of WSTC Securities.

Okay. A follow-up to my initial question. I just want to add, is the onboarding of UPDC's REIT, way happened before the binding from Custodian, the execution of the binding offer.

In terms of timing of those transactions. My -- as I've mentioned earlier, they're subject to certain regulatory and shareholder approvals for the unbundling of the UPDC REIT. So we expect those to occur this calendar year, but I'm very careful about the timing on things that are not in our control. My suspicion is that they are wondering about economic impact for both package and to put very simply, both parties expects to receive their proportionate share of unbundled UPDC REITs, if that is what you are wondering in terms of timing of sequencing.

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

Thank you, once again, Tay, and I thank all participants for joining and for the thoughtful questions. We are cognizant of the feedback we received. And we hope we manage particularly the specific unique factors that so negatively impacted our performance in the first half, and clarify the initiatives we plan to focus on to drive value going forward. Many of you are familiar with Funke who just joined us to head our Investor Relations. A key component of our approach is to provide as much clarity and transparency to the investing community as possible. And so please feel free to reach out to Funke with any follow-on questions or comments that you have. Thank you.

Thank you very much. That concludes the UAC of Nigeria Half Year 2020 Results Conference Call. You may now hang up. Thank you.