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

Good morning, and good afternoon, ladies and gentlemen. Welcome to UAC of Nigeria PLC Full Year 2022 Results Conference Call. Please note that this call is being recorded. This conference call will be hosted by Fola Aiyesimoju, the Group Managing Director of UAC of Nigeria PLC and Funke Ijaiya-Oladipo, the Group Finance Director. Following prepared remarks by UAC's management team, there will be an interactive Q&A session. I will now hand the call over to Fola Aiyesimoju. Please go ahead.

Thank you, Temitope. As Funke and I run through our prepared remarks, we will refer to page numbers, which can be found in the top right corner of its slide. Please turn to Page 4. 2022 was a very difficult year for us with performance deteriorating from a net profit of NGN 2.6 billion in 2021 to a net loss of NGN 3.9 billion in 2022. Operating conditions over the course of the year were very difficult, but do not entirely explain the deterioration in performance, which was largely on account of decisions made relating to our Animal Feeds businesses. The most significant initiative we embarked on over the course of the year was the implementation of SAP S/4 HANA, our new enterprise resource planning system, which absorbed meaningful management focus. And, to a lesser extent, also impacted performance. We are glad this is behind us as we went live in July 2022, and completed hypercare in September of the same year. We also completed an expansion project for our SWAN water business with installation and commissioning of a state-of-the-art Krones line, which increased capacity three fold. We are now enjoying the benefits from this investment. The bright spot was our Paints business, which performed very well in spite of challenging macroeconomic conditions. And in our Quick Service Restaurants business, we continue to execute our corporate store rollout strategy. On Slide 6, we outlined our group structure and note that there were no meaningful changes with the only change being a marginal increase of around 1.5% in our ownership stake in CAP, taking that stake to just under 58%. Slide 7 summarizes the macroeconomic conditions that impacted performance, which were low growth, high inflation, currency devaluation and challenges sourcing foreign exchange. We also saw boring costs escalated towards the end of the year. On Slide 8, we highlight the continued trend of input cost escalation with the full effect of input cost increases from 2021 felt in the 2022 financial year, combined with further increases over the course of the 2022 financial year. Eatable input costs, which we do not reflect on this slide or which impacted broader aspects of our business from production and cost of distribution was the price of diesel, which increased almost threefold over the course of the year. On Slide 10, we touched briefly on the strategic initiatives we executed over the course of the year. As mentioned, we invested just under NGN 3 billion expanding capacity plus SWAN water business. which has been unable to meet demand for years, and we're beginning to reap benefits. We also invested NGN 1.2 billion in rolling out corporate stores for our restaurants business and just about NGN 2 billion on the migration of our enterprise resource planning system to SAP S/4 HANA. Images of our new water line are on Slide 11 of this presentation. And images of our corporate stores on Slide 12 of this presentation. In the next section, starting on Slide 14, the [indiscernible] performance for operating segments. As mentioned, our Animal Feeds business was the primary cause of underperformance with a NGN 7 billion year-on-year decline in net profit. The segment recorded a net loss of NGN 6.2 billion, with underperformance largely at Grand Cereals. There were 2 primary reasons ignoring the broader macro that contributed to the collapsing performance. The first was purchasing agricultural commodity input at near the peak of the market, with the expectation that the Russia-Ukraine war would lead to further price escalation. We got this wrong. At peak, we have 267 days of inventory valued at NGN 40 billion and finance NGN 33 billion in short-term debt, efforts to optimize formulation to improve margins resulted in a further drop in product performance, which impacted revenues and exacerbated the high inventory challenge. We took the decision to focus on aggressive deleveraging and sacrifice margin to do so. We managed to reduce inventory to NGN 17 billion by year-end and debt to NGN 14 billion, and these numbers have declined even further over the course of this financial year. We feel that we're near the end of the performance impact of the high cost inventory we carried over most of the last year. We also have addressed product performance and witnessed a recovery in product volume sales. Slide 15 simply sort of highlights the inventory and leverage trends I just discussed. And on the bottom of the slide, you would see the peak of inventory at about NGN 40 billion and what we have continued down to by the end of the year. And at the bottom right of that slide, you see the similar numbers for the leverage that supported that inventory. On Slide 16, we focus on our packaged food and beverage business, UAC Foods, which produces Gala supreme, ice cream and [ SWAN ] water. It was [indiscernible] 2 halves with a profitable first half or the value loss in the second half. The second half was really impacted by ERP migration. We have customer statement reconciliation issues, which affected customers' ability to place orders with us. And this really negatively affected sales in the third and early part of the fourth quarters. These have been addressed, and we've seen a recovery to historical trend by December. We took aggressive cost saving measures in line with the reduction in sales. And these have further boosted profitability in that business going into this year. The key expectation as the segmental benefit from utilizing our recent investment in the water line to grow revenues and continued strong performance in the ice cream segment. We announced plans to construct a greenfield factory and we have paused these plants until performance recovers to levels sufficient to warrant the investment. Slide 17, again, just graphically depicts the impact of the poor second half of the overall performance for the packaging business. On Slide 18, we focus on our Paints business, we performed very well in spite of the challenging macro. Revenues were up 25%. Net profit grew by 100%. And here, we found the balance between price interpreted margin and ensuring adequate volumes with deepen distribution by rolling out more color centers and improved customer service by improved delivery times. Slide 19, focused on our Quick Service Restaurants business, which continued to roll out corporate stores, we rolled out 19 with Mr Bigg’s and Debonairs stores over the course of the year, taking the total to 30 and we've set a near-term target of 50 stores. This segment was negatively impacted by escalating diesel cost as each individual store requires standby power. We're working in records to drive profitability by limiting costs by initiatively implemented was moving to solar at the head office and exploring how this can be deployed, solar and gas can be deployed at certain of the corporate store locations, but that is very much work in progress. Our associate companies UPDC and MDS Logistics performed well as highlighted on Slide 20. UPDC returns to profitability at a 6 years of losses with the profit before tax of NGN 331 million. Our sales from the most recent development, Pinnock Prime as well as certain legacy assets resulted in a more than sevenfold increase in revenue. At MDS, the focus is on scale dedicated business with NGN 8.5 billion are invested to acquire 165 additional trucks. This business also returns profitability in 2022 and benefited from aggressive cost management efforts. Please turn to Slide 22, and I will hand over to Funke to take us through the consolidated financial performance of the group.

Thank you, Fola, and good afternoon, ladies and gentlemen. This slide provides an overview of the group's financial performance comparing the full year results for 2022 with 2021. The group recorded top line growth of 8% to reach NGN 109 billion in 2022 as a result of revenue growth in all our segments except the Packaged Food and Beverages. Gross profit margin contracted 427 basis points to 13% as a result of rising raw material costs, which were not sufficiently offset by price increases across our businesses, apart from the Paint segment, which recorded a 700 basis point expansion in gross margin. We recorded an operating loss of NGN 2.4 billion and this was impacted by the underperformance of Animal Feeds and other edible segment. Loss before tax from continuing operations was NGN 4.4 billion, with profitability further impacted by higher finance costs directly correlated to the 500 basis point increase in the monetary policy rate during the year. As Fola mentioned, our associate companies, UPDC PLC and MDS Logistics returned to profitability in 2022. The impact on the group's performance was NGN 103 million compared to the share of loss from these associate companies of NGN 895 million in 2021. We recorded a loss per share of 107 kobo compared to the earnings per share of 62 kobo in 2021. Free cash flow for the period was NGN 9.6 billion compared to the negative NGN 19.1 billion in 2021 due to improved working capital management in 2022. Please turn to Slide 23, which provides additional context on the key drivers of the operating loss in 2022. Our operating loss was impacted by 3 broad areas. And the first was the underperformance in our Animal Feeds business, which more than offset the NGN 3 billion operating profit in the Paint segment. The second was a significantly higher operating expenses particularly in Power and Distribution. Our businesses with cold and frozen components and the supply chains, which are ice cream and our restaurants businesses were particularly affected. The third factor was at the holding company. In 2021, the holding company recognized a one-off dividend and a gain recognized on the unbundling of UPDC real estate investment trust. And that impacts the year-on-year comparison. In addition, the conservative approach was adopted towards valuing the investment properties at the holding company, which resulted in an unrealized fair value loss on these properties. Please turn to Slide 24, which shows the impact of the Animal Feed segment on the group's 2022 performance. And the summary is that profitability was disproportionately impacted by the Animal Feed segment. Please turn to Slide 25, which is a snapshot of the group's financial position as of 31 December. The group had NGN 45 billion net Assets and the year-on-year movement reflects the decrease in inventory and debt across the group. The group's net debt stood at NGN 2.8 billion, which is NGN 6 billion lower than 2021 as a result of the deliberate efforts to reduce leverage in the Animal Feeds segment. Our businesses invested NGN 7 billion CapEx in the period, 40% of this amount was for our Packaged Food and Beverages business, specifically the new SWAN spring water bottling line that was commissioned in the fourth quarter of the year, as well as mixes and cold chain infrastructure for our ice cream business, 30% of the capital expenditure went towards upgrading our IT infrastructure across the group to SAP S/4 HANA and 20% was to support the expansion of the Quick Service Restaurant network by UAC Restaurants, which opened 19 new Mr Bigg’s and Debonairs Pizza stores in 2022. Our cash cycle improved to 76 days and this is directly correlated to the reduction in inventory at our Animals Feed segment. I will now hand over to Fola, who will take us through the next section of the presentation.

Thank you, Funke. We proposed a dividend of 22 kobo per share, which were lower than the 65 kobo for the 2021 financial year and is reflective of the decline in the company's performance. Subject to shareholder approval, the dividend is expected to be paid on the 22nd of June 2023. The next Slide 28 highlights our focus going forward with by far our biggest objective being reversing the performance trend at the Animal Feeds business and addressing the challenges that negatively impacted performance at our Foods business. One of our biggest challenges continues to be the wave of immigration, which makes it challenging to fill open roles, but we continue to work very hard to attract the best possible talent that we can. We continue to focus on simplicity of our group structure and are exploring avenues to eliminate duplicated costs. Thank you, and we'll now take questions.

[Operator Instructions] Your first question is from Michael [ Ole ].

[indiscernible], and I do have a couple of questions that I wanted to find out. I know you've talked on some more REITs. But I guess there will be a bit more color on context that would be appropriate. So I just wanted to know, first of all, you talked a lot about energy. I just wanted to understand in your energy strategy management, considering the impact energy has [indiscernible] on your business for last year and going forward, how you see that involving? I also wanted to understand do you have [indiscernible] Eurobonds? I know you -- the company had a bit of financial investments. I wanted to understand if you have explosions to [indiscernible], what has been the impact so we know what happening, I just want to understand that a little bit more. So I wanted to recall -- I know you mentioned some of our declines in volume. I do have a question about volume declines, but I know you mentioned something around the impact of your SAP -- your IT infrastructure and partial volumes. So I just wanted a bit more clarity on that because I saw that volume seemed to have declined quite sharply in some of your businesses. I also have a lot of question on your cash balance. Why do we view that cash balance? It is something we want to use because it seems to be sitting on the balance sheet. Yes, I know you got any interest income. I just wanted to understand what the product management is in deploying that cash on the balance sheet. Yes, it's come down from historical levels, but just want to understand how that performed? I saw that there was a group PP&E tangible assets. So I guess that tangible asset you explained was just also so that your property [indiscernible] expansion couple of years about your Animal Feed business. I wanted to understand where are you on that [ joint ] or what has changed in that regard. And the final question I will have is our share-based compensation. I realize that it grew the [indiscernible] on a year-on-year basis in your balance sheet. I wanted to understand it -- I presume it's from last year, but I just wanted more color on it. Thank you.

Thank you, Michael. I will tackle some of the questions then I will let Funke get to address some. So the first one had to do with our energy strategy. And -- as you know, we have various businesses in the group. The 2 heaviest consumers of energy, Grand Cereals and UAC Foods, the 2 heaviest consumers of energy. But UAC Foods, we're doing many things. One, we've already done. We've actually put in place solar for our ice cream and water plants. The second thing we're doing is we -- at late stages of trying to move ice cream plants to gas, we would save about NGN 60 per kilowatt hour should we succeed in that. And we are also in the process of testing. We've worked to adjust electricity distribution to get a dedicated power line to our water business, which would also drop the unit cost of energy by about NGN 60. So for UAC Foods I summarize which already done, trying to move dairy plant from diesel to gas, I'm trying to get a line from just an exist distribution to our current plant. And so these things are -- we're actively working and I expect these to be near-term initiatives. And then on a more tactical perspective, it's just been very focused about actually reducing the volume of energy consumed. So that's from a UAC Foods perspective. From a Grand Cereals perspective, the biggest thing we've done is that we've installed a biomass boiler in our Onitsha plant that is working on 1 line in the plant. We're trying to expand it to 2. And if that goes very well, we would move that across and implement the same in just -- so those are the biggest energy consumers. For the other companies that are small energy consumers, CAP is also exploring gas a little bit more complex, given that they don't consume that much energy, so may not warrant a dedicated gas line, but we're exploring that as well. And as I mentioned, UAC Foods -- UAC Restaurant, sorry, has already installed solar at its factory. We are at very early stages, very, very, very early stages of trying to see if we can leverage the proximity to our Foods business to also move that to gas, I'd say a bit more. And I think in through what we can do with solar and gas in the actual stores. So it's a huge topic for us, and the 2 biggest ones, Grand Cereals and UAC Foods [indiscernible] CAP, UAC and Livestock Feeds are [indiscernible] that. Then our Eurobond exposure, a very short answer, we have none. Volume decline just to explain how that is linked to ERP migration. Fortunately or unfortunately, our Foods business was the most advanced in terms of ERP usage. And customers got their statements issued every month from the system. At the point of migration, we missed a few months of giving customer statements. Our customers give the statement very much as bank accounts. And so the customer who didn't know if they [indiscernible] stopped placing orders. So we have to reconcile, I think, over [indiscernible] statements. And as we reconciled, we unblocked and these customer orders. So that's what I referred to when I referencing -- when I linked the ERP migration with a volume decline. With our cash balance, I think our views are simple. We would like -- we view cash either return to shareholders or deploy in growth opportunities. We, as you rightly point out, how we reduced cash balance, we've done quite a bit to share as in the last 2 years. We did a special dividend in 2020 and a much higher ordinary dividend than we are doing this year in 2021. We would explore -- we will over the course of this year, see what the group's investment needs up. But our stance is if capital is not going to be invested profitability then return that capital to shareholders, that's the philosophy. PP&E growth, I think, in the course of Funke's and my presentation, we run through those businesses that had absorbed capital. UAC Foods had a NGN 3 billion investment in the water line, UAC restaurants about NGN 1.2 billion in rolling out corporate stores. So those are the 2 biggest drivers in terms of growth in PP&E. And share-based composition, these are just simply provisions, which grew every year because we provide every year that it grows. And the actual measurements will be done based on the shareholders' experience return, if management does not deliver the shareholder return set out, this does get reversed because money will get 0. If management does deliver, and these get applied towards the competitive management. So I think -- I don't know if I missed or mischaracterize anything or anything you want to add to Michael's questions.

I have nothing else to add.

Your next question is from [ Brad Babinski ].

I have 2 questions. The first is I was wondering if you could introduce your new manager of UAC Foods sort of go into what his background is and why you think he is the right person to manage the business? And the second question, is sort of looking at the ROIC by business. It seems like your Paints businesses sort of at a whole another level than all of your other businesses. And it seems like it warrants a disproportionate amount of capital and investment. And I wonder if you agree with that. And if there's opportunities for you to sort of aggressively grow that business or invest into it or buy more of it?

So I think just to recap it, I think your 2 questions with a bit of background on Yemi Oloyede who is the new MD for our Foods business. And to comment on sort of plans for the Paints business from 2 -- along 2 dimensions. One is aggressive growth and the second is ownership. So with UAC Foods, I'm not sure if you're aware, but I ran that company myself until mid-March. And the reason why I did that was because we didn't want to be rushed into a decision to appoint a Managing Director of the company. We conducted a very broad search for candidates and got a very strong suite of candidates. I sort of spent a lot of time going through each one. Yemi's background is a first-class math graduate. He started off his career in sales at Procter & Gamble, where he rose to a regional sales manager. He then moved on to L'Oreal where he was the national Sales Manager from Nigeria and Ghana. Then he spent 3 years with Kellogg in South Africa. He was a regional business manager for West Africa. And for the 5 years before he joined us, he was the General Manager for West Africa for Kerry Foods and Kerry is a global food technology business. And he run a company of equal size to UAC Foods. We spent hours engaging with and interviewing Yemi and we came to the conclusion that he brought the energy, ambition, intellect to drive the business or to deliver the kind of growth we want for the business. And we also conducted hours -- I mean I inspect 7 hours of background calls and the background calls supported the views we had. So Yemi has started now. He is 3 weeks in the job. We work very closely to ensure that we support him in this transition. And everything we've seen in the first 3 weeks has been very, very early days, gives confidence that he would deliver on what we hope for in the cost of our engagement with him. As regards CAP, we agree [indiscernible] completed, we also [indiscernible] by ROIC, and it is by far the #1 priority in the group. That business has increased threefold in the last about 3 years. It was a NGN 7 billion business for 5 years until 2018 or so, last year across 20 billion, and the management team at extremely aggressive plans. The summary is, from a capital perspective, what CAP 1 CAP gets. So we aggressively push management to grow that company. Luckily, the reason why the ROIC is so had -- is so high rather, it's because it's not a very capital-intensive business. So we haven't sort of spent for the sake of spending. The things that we are exploring that may require capital, we mentioned this on our last call. We're very, very, very active in terms of how to grow into the region, and we're exploring acquisition opportunities. But the summaries we share with you the gross CAP as aggressively as we can. In terms of ownership, we are in the market constantly looking to pick up shares in CAP is extremely thinly treated. And from a UAC perspective, it only makes sense to buy meaningful blocks, buying 20,000 units here or 10,000 units here doesn't really move the needle. But yes, we would like to increase ownership in [indiscernible] CAP. And we would like to -- we have -- we believe we're aggressively growing the business. We plan to continue to aggressively grow that business.

Your next question is from [ Abdulrauf Belu ].

So my question, without trivializing the difficult operating environment, I mean, we all know the kind of environment we are in, how would you describe your position in the Animal Feeds industry speaking of your competitive advantage? It appears to me that even beyond the general macro and operating challenges, it does seem to mean that you find it difficult to effective with price in that business. I know of other similar companies faced with IR operating and input cost but was able to pass on the cost to consumers to a larger extent. So how would you describe the competitive advantage in that space? My second question is I noted during your presentation that migration to a new tech platform sort of impacted sales. So I'd just like to clarify that, okay. Now that [indiscernible] life, can we expect to see some top -- a rebound in top line performance in 2023?

Look, you've -- to be very clear, I hope I didn't -- I hope I wasn't misunderstood. We do not believe our 2022 performance was on account of macro. Macro contributed was a tough year but a tough year didn't account for the swing in profit we saw with Animal Feeds alone swinging by NGN 7 billion. I think in our Feeds business, we had 2 wrong calls, one was going very long inventory. We expected -- I mean, Russia-Ukraine quarter Global Green output, that if we didn't lock in those prices, the prices will rise further and we got that call wrong. When you carry inventory at higher levels than market, it's very difficult to just simply passing that price into the farmers because the farmers can buy cheaper. And so we tried to reformulate to [indiscernible] the margin, it affected product performance and hit us doubly hard. So just to stress, we do not blame macro for 2022 performance in the Feeds business. Around -- your specific question around competitive position, there are a very few things that farmers care about and there are 3 or 4 players that I would say are equally well positioned. There are the brand of the company, so farmers would be -- there's a huge risk in terms of buying the wrong batch of feed. So the brand helps. And I would say our Vital and Livestock Feeds brands are right up there. There's product performance, which is what yield you get on your eggs and what's the speed of [indiscernible] for your birds and your fish. We are right up there. We've historically been right up there. We suffered mid last year when we tried this reformulation, but I will put us at the top of the power when it comes to product performance. And the final one is customer service, which is the speed with which we deliver goods to farmers when they place their orders. There still we have room to improve. So I don't think we suffer any competitive disadvantage in either of our feeds businesses. I think the challenges that occurred last year were unique. I'm not on account of some broader concern around our competitive position. As regards the specific change of Foods business, it has already rebounded. February was horrible. I think it was horrible for every company in Nigeria on account of this cash issue, but we're not looking forward to some rebound about the course of the year from December, January where we saw the ERP-specific changes I mentioned with us. And we expect that as long as there's no other major shock to continue to improve over the course of this year.

Your next question is from [ Onemehu ] works with Money Africa. [ Onamehu ] has 2 questions. The first one is, any updates on plans to invest in the tech space. And the second question is, is Grand Cereal and Livestock Feeds may just still being evaluated?

In the tech space, we don't plan to make any further investment or I'll say any further meaningful investments. We have a small investment in a fund, and we get to see the entire space. And also, we get to -- we get many inbounds of companies that may add value to us. So no, we don't plan to become a major tech investor. Grand Cereals Livestock Feeds, yes, a major mix absolute sense. It is not our priority for now. Our priority is on addressing performance in -- particularly in Grand Cereals, and that's our priority for now. So yes, it makes absolute sense, but it's not a priority until we address the performance issues.