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

Following prepared remarks by UAC's management team, there will be an interactive Q&A session. I will now hand over -- hand the call over to Folasope Aiyesimoju. Please go ahead.

Thank you, Temitope. Good day all, and welcome to UAC's Half Year 2023 Results Presentation. As Funke and I run through our prepared remarks, we will refer to page numbers, which can be found in the top right-hand corner of each slide. And please now turn to Slide 5. Operating conditions in the first half of 2023 were very difficult. We experienced high levels of inflation continuing a trend from 2022. We grappled with acute shortage of cash in circulation on account of challenges with the execution of a currency redesign program. Businesses were closed as Nigeria held elections across various tiers of government. The economy suffered a dual shock of petrol price deregulation and liberalization of the foreign exchange regime. These factors affected businesses in multiple ways. Trading days were lost, consumer purchasing power reduced, input costs escalated and distribution cost rose. In addition, companies with foreign exchange denominated liabilities recorded meaningful mark-to-market losses. At UAC, we focus on capital allocation and operational execution and continue to try our best to navigate the current climate. A factor that is not reflected in the charts on this slide is the continued loss of talent to immigration. This remains one of our biggest headaches. Slide 6 outlines the price escalation for key raw material inputs in our operating segments. In the Animal Feed and Edibles segment, the biggest concern over the course of the half year has been sharp escalation in the cost of Maize, with prices increasing from NGN 250,000 a tonne to more than NGN 400,000 tonne. Key raw materials in the Paints segment were relatively stable in the first half. However, we expect the sensitivity to foreign exchange rates to drive price escalation over the course of the second half of the year. Our Packaged Foods and Quick Service Restaurants businesses have both experienced sharp escalation of key raw material inputs. Prices for flour, vegetable oil, milk, powder and sugar have all risen meaningfully. Here also, we expect the trend to continue on account of pressure on the naira. As mentioned, perhaps the biggest macroeconomic shock in the first half of the year was the increase in the price of petrol, which have broad inflationary implications. We've seen increases in our selling and distribution costs, and we'll see increases in employee costs going forward. On our full year 2022 results called in April, we highlighted the negative impact of underperformance at our Animal Feeds and Edibles businesses as well as challenges in the second half of 2022 in our Foods business. As such, our focus over the course of the first half of the year has been reversed in the performance trend in these businesses. Slide 8 highlights the progress we have made, which culminated in an overall return to operating profitability in the second quarter of the year. We made certain capital allocation decisions, which resulted in net profit to meaningfully in excess of operating profit. Slide 9 outlines progress in our Foods business, which still requires considerable efforts. We reduced operating expenses and refined pricing to achieve a more than 80% reduction in the monthly loss rate. We have also rebound the technical and operations teams with a bit to improving product quality and consistency. We are implementing projects to reduce energy costs and deepen distribution and expect to see the full benefits over the course of the year. It is important to note that this business is most sensitive to the challenging economic conditions and rising interest rates. And as such, progress will not be linear. We expect a very challenging Q3. In our Package Foods and Edibles business, we similarly delivered meaningful operational improvement from driving efficiency and improving product availability. We also carefully selected target markets to manage distribution costs. Here also will be affected by current challenges, but we expect the overall positive trajectory to continue. Slide 11 touches on our other businesses. Our Paints business continues to deliver solid growth in revenue and profitability, and we are increasingly focused on localizing supply chains and deepening distribution. Our Quick Service Restaurants business currently has 30 corporate stores, and we are implementing initiatives we expect to meaningfully reduce the operating cost base in these businesses leveraging scale within the group. MDS Logistics continues to deliver operationally and grow its haulage business. And at UPDC, we are accelerating the property development aspect of the business to drive profitability. In addition to the operational initiatives discussed, Slide 12 outlines efforts relating to governance, people and structure. To better align overall strategy and governance, I now chair the Board of Directors of our key businesses, Grand Cereals, UAC Foods, CAP PLC and UAC Restaurants. Livestock Feeds the eco business within our group continues to be chaired by JID, Joe Dada. Debola Badejo, who was most recently Managing Director of our UAC Restaurants, has been appointed Executive Director of investment at UAC and will work with me on driving overall value creation as well as seeking the opportunities for growth. We recently received shareholder approval and court-sanctioned at the UAC Foods and SWAN water level for the merger of these businesses. You recall that UAC Foods 100% on subsidiary of UAC itself owned 97% of a separate legal entity, Spring Waters Nigeria Limited, which owns the business on SWAN our Spring Water business, and we're combining these 2 companies into one entity. Post the merger becoming effective you will we'll own more than 99% of the equity in the enlarged UAC Foods. And finally, we continue to try to actively manage borrowing costs, leveraging the capital market as appropriate, and we have NGN 6 billion of commercial borrow outstanding, which we lend to our operating segments. I will now hand over to Funke to run through details of our financial performance.

Thank you, Fola, and good afternoon, ladies and gentlemen. Please turn to Slide 14. And this slide provides an overview of the group's financial performance, comparing the half year results for 2023 with 2022. Our results for the first half of the year were mixed. Performance in the first 3 months of the year was characterized by slower top line growth, which was impacted by limited trading during the general elections and [indiscernible] of cash, which affected consumer demand. In the second quarter of the year, we delivered double-digit growth in revenue, gross profit, operating profit and earnings per share. Looking at the entire 6-month period compared to 2022, the results are modest. To put this context into numbers, UAC Group recorded consolidated revenue of NGN 52.9 billion, 2% higher year-on-year. All of our operating segments recorded top line growth apart from the Packaged Food & Beverages segment. The group's revenue growth was primarily driven by price increases implemented across all our operating segments to mitigate the impact of inflation as well as strong volume growth in our Paint segment. Gross profit margin contracted 87 basis points to 16.3% from 17.2% as a result of rising raw material costs, which were not sufficiently offset by price reviews across all our businesses, apart from the Packaged Food & Beverages segment, which recorded a 379 basis points expansion in gross margin. The Packaged Food gross margin expansion was a result of improvement in conversion costs, particularly in raw material costs and also power efficiency as we transition from diesel to gas at our Snacks factory in April this year. The group recorded a small operating loss of NGN 35 million, and this was impacted by two things. The first is higher operating expenses, which increased 14% year-on-year, and this increase is reflective of the broader impact of inflation on expenses. As a group, the most significant increases experienced were electricity and power costs, distribution expenses and personnel expenses, and these are attributable to higher electricity tariffs and diesel prices, higher haulage rates and cost of living adjustments to employee remuneration. The second factor to note is that in 2022, UAC the holding company recorded NGN 400 million other income, representing profit from the disposal of noncore property assets, which affects year-on-year comparison. We recorded profit for tax of NGN 3.2 billion, and our profitability was supported by two key things. The first is net finance income of NGN 2.7 billion recorded in 2023 compared to net finance cost of NGN 1.5 billion in 2022. Our finance income was driven by higher yield on financial investments and more materially, the naira devaluation in June, which resulted in foreign currency revaluation gain of NGN 3.6 billion on the group's treasury investment portfolio, of which approximately 30% is denominated in foreign currency. Our finance costs were broadly flat year-on-year, reflecting the impact of deleveraging to mitigate rising borrowing costs. The second is that we recorded a share of profit from our associate companies of over NGN 480 million compared to a loss this time last year. The share of profit reflects the net impact of the profit from our Logistics business, MDS, which was driven by sales from haulage operations and a small loss from UPDC Plc, property development business. Overall, our earnings per share for the period was 53 kobo in 2023 compared to a loss per share of 17 kobo in 2022. Please turn to Slide 15, which provides additional context on the key drivers of operating profit in the second quarter of 2023. We recorded operating profit of NGN 665 million in the second quarter, and this was supported by higher revenue across all operating segments, which more than offset increases in operating expenses. We also recorded a small profit as other income from the disposal of investment property. Please turn to Slide 16, which provides additional context on the key drivers of our operating profit in the first half of 2023. As explained earlier, we recorded a small operating loss of NGN 35 million in the first half of 2023. The profitability that we recorded in the second quarter of the year did not offset the underperformance in the first quarter. Please now turn to Slide 17, which shows a snapshot of the group's financial position as at 30 June. The key things to highlight here are our debt. Our group's net debt is NGN 3 billion. Our overall debt to external parties is NGN 18 billion, and this amount is largely short term in nature to support working capital across our businesses. We are conscious of the impact that finance costs have on our profitability, so we continuously seek to optimize funding and have taken deliberate steps to reduce leverage, particularly in our Animal Feed segment. The second point worth highlighting is the capital expenditure, which is largely attributable to our Packaged Food & Beverages segment, more specifically the final phase of our recently installed bottling line for our Spring Water business. I will now hand over to Fola to take us through the next section of the presentation.

Thank you, Funke. In conclusion, we expect more short-term economic challenges, which we hope will give way to improved market conditions as the effect of recent reforms are felt. As such, we expect that margin pressure will continue, and we will seek the balance between absorbing rising costs and passing these on to the already stretched consumer. We have taken certain steps to ease the burden on some of our most vulnerable employees and need to do more. And our focus over the rest of the year will remain firmly on performance at our Animal Feeds business. We will continue to focus on simplicity and efficiency and work hard to address the immigration-related challenges as it relates to talent acquisition and retention. And thank you for making the time to participate in this call, and we will now take questions.

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

I just wanted to -- I didn't catch anything on the Restaurant business. I know a couple of quarters back, you've talked about your expansion plans. So just wanted a bit more context around the groups, the investments into the Restaurant business.

Michael. I think -- you're probably referring to was our commitment to get to in the near term 30 corporate stores opened, which we have achieved. What we are doing now is on trying to drive profitability through those 30 stores, and we've identified a number of initiatives where we can leverage the overall scale of the group to meaningfully drive down the costs in that Restaurant business. We're implementing these projects over the course of the second half of the year, and then we will go back to continued acceleration of corporate store out for the Restaurant business. Michael I hope that I answer your questions. [Technical Difficulty] Sorry, I apologize that we had a bit of a glitch with the slides movements. We had Internet connectivity challenge with through the slides off. Hopefully, we've caught up now. Temitope back to you.

[Operator Instructions] Your next question is from [ Brad Webskey ].

I have just a couple of questions. On the QSR business, what level -- what number of restaurants do you think is the right number for profitability to start to come through there? So like do you need 50 restaurants to see profitability? Or can you see it, you think close to the number you're at?

Brad. I think if you asked this question a year ago, the target number we had in mind was between 50 and 60 restaurants somewhere around that depending on how well each individual store performed. If we are successful with what we're trying to do now, that number comes down meaningfully to our maybe between 30 and 40 restaurants.

Okay. And this is -- the things you're talking about is sort of sourcing using the group balance sheet that's like -- when you're talking about using group resources sheet to like is that what you're talking about?

Look, at the danger of giving away a strategy, what we realized was that UAC Restaurant is 2% or so of the group's turnover relies on several inputs that we use in other parts of the business. So the Foods business and the Restaurants business put use its beef, flour, sugar. The restaurant business is consuming fractions of what the food business consumes. And the Restaurant business factory was running on diesel. They are factories in very close proximity running on gas. So it's just at least half a dozen of operational initiatives from sourcing to cost of energy, which we are already implementing. And if we get these done successfully, we should take out easily half of the conversion costs in this business, which will bring profitability much closer even at the number of stores we have today.

Okay. And also follow up on that. So you moved the restaurant MD back to the group. Who is the new restaurant MD? And what's that person's background?

So the restaurants, we are in the market for a GM of the Restaurants business. In the interim, the restaurant MD Debola continues to oversee that business he is the Executive Vice Chairman of that business. And part of the -- for this change was -- if we are successful, and I don't see any reason why we will not be, with this leverage we're trying to achieve, a lot of the back of house a lot of the factory of the restaurants business would be meaningfully reduced and then the focus of them being the [indiscernible] GM to run the corporate stores. So in the market for GM, we expect to 0.1 by late third quarter, early fourth quarter, and the interim Debola continues to oversee that business.

Okay. Another question I have is the margin in Q2 for Paints and Packaged Foods was significantly higher than Q1 is a good margins. Are those margins you think sustainable going forward? Or was there like a -- was it a weird thing that -- were there onetime reasons for the higher margins in those 2 businesses?

I would say -- I mean, it's a very difficult question to answer. Let me deal with the second part, which is easier. Q1 was very affected by the month of February. To the month of February was the month in which the impact of the currently designed program was most acutely felt. And volumes dropped January to February by, let's call it, between 30% and 40%. So even at the same negative margin, so revenue minus material costs with a 30% drop in volumes, you really compress your gross margins. So Q2 and Q1 are not directly comparable. So that just -- that's the one-off that may skew those numbers. Going forward, I mean both businesses have reasonably strong brands and good pricing power. So we're going to attempt to maintain those margin levels, but it is difficult to overstate how stressed the consumer is in this current period. We expect this to settle down over the course of the year. And to the extent to which we can keep pushing those material price increases without seeing a meaningful drop in demand is very difficult to estimate. But over the long run, given the pricing power in those 2 businesses, we don't see any reason why the margin profile will meaningfully different.

Okay. And then just last one for me. Is the -- obviously, the operating -- new administration lots of changes happening. I'm curious from your perspective, from either a capital planning perspective, either big CapEx projects you're looking at? Or from an M&A perspective, has your outlook there changed at all? Like are you more willing to do something big? Or is it still wait and see? Or you have to -- obviously, you have to turn around Animal Feeds that initial priority. I'm just curious how you sort of -- what you guys are focusing on now?

Okay. So look, I think we're long-term bullish and our view is that in times of pain, like Nigeria is going through now there's meant to be an opportunity and companies like ourselves who have been here for over 100 years and must position ourselves to take advantage of the opportunities that come our way. That's not long term, and that sort of our stands. Short term, we think there's going to be a very difficult couple of quarters, whether it's 1 or 2 or 3, we don't know. And so we're going to be short-term cautious, just making sure that we have liquid, we're not extending ourselves so that we are around to take advantage of these long-term opportunities as we see come away.

Your next question is from Ifeoma, who works with Ecobank. Ifeoma has 2 questions. Firstly, Fola mentioned that short-term economic challenges are expected. My question is what measures are being put in place to cushion the effects of these challenges when they occur. Secondly, how did the group managed with employee remuneration and compensation.

Thank you. I think the first one Ifeoma you referred to cushioning the effect, I'm not sure if you're referring to on our numbers or for our stakeholders. So I will address both. I think for our stakeholders, we have taken baby steps to do more on our primary stakeholder in this regard, our employees. So for the most vulnerable, the lowest paid employees, we've done sort of one-off palate payments, and we're currently going to refuse to sort of try to move compensation to much. There's just higher cost of living that employees are going through. For the business, we are focusing on liquidity. So we need to make that there's liquidity to survive whatever storms come through. We are laser focused on margin. Layer focused on margin because it's very easy for your margins to be routed. I mean it is high inflationary environment and avoiding unnecessary expenditure in terms of the things we do for the business and the, I guess, primary stakeholder we focus on in this regard.

Your next question is from Chema works with Stanbic IBTC. Chema wants to know how many restaurants you have currently?

We have around 60 restaurants. Currently 30 the corporate-owned and around 30 franchised restaurants. A number of franchisees moves about quite a bit. It's come down over 100 because we are very aggressive in shutting down any franchisee that does not meet our quality standards.

Your next question is from Goki...

Temitope, I've lost you. So if you please take that question again.

The next question is from [ Gokila Trombone ].

I can read Gokila's question. Look, I believe your question is around exports to African countries. We have not started. We plan to start with Cameron. We've recruited a team that is now in place. And unless we're very unlucky, we would get the first batches of Paints after Cameron sometime this year. We have modest transpiration for what this would do to the business, just in terms of the scale of Nigeria relative to Cameron, it's I mean about 10x the size and the different in market position of the brands in Nigeria versus Cameron, but we plan to learn from the experience and then accelerate the from. But it going to happen to be meaningful drivers of top line of Paint in the near term.

Your next question is from [ Sharuti Patel ].

[ Sharuti ] if you're speaking you're still muted. So I can't hear you. Okay. Temitope let's go to the next question and then come back to [ Sharuti ].

[Operator Instructions] Your next question is from Mike.

This is Mike McGaughy from Research Alpha. I want to see if we can get some insight into the market share of the Feeds business. And is that market share increasing or decreasing? Or what's the trend there? And also who are the biggest competitors in that sector?

Okay. Michael, we have about -- I mean, just to point out the Feed business operates in 3 big segments, poultry feed, fish feed and edible oils were the biggest contributor by far to that business is the poultry feed business, about 70% of the company. And there we have about 18% market share. We have lost market share in that space over the last few years. And the biggest competitors, they are Olam and the next Olman top feeds, which is part of the [indiscernible] group. Again, there's -- and I'm referring to the commercial feed mills, you have big players who meal for their own consumption, but I'm limited to the commercial feed millers. It's also a company called Hybrid. So I'd say Olam and [indiscernible] mill has been the most direct and then Hybrid being another [indiscernible] in the segment.

Your next question is from [ Sharuti Patel ]. She says thanks for the results call. Much appreciated. I'm looking at Slide 11. I'm wondering how those segments shipped over the next 5 years, i.e., how much contribution to revenues do you see from QSR in 2028, for example?

[ Sharuti ], it's difficult to put a number on to it because I know you're going to hold me to that number in 5 years. But we expect to grow -- if you look at Slide 11 and 2, 3 and 4 are Packaged Foods, Paint and QSR, we plan to grow them aggressively. So every dollar for growth goes first into those 3 segments. Now which of them would -- how quickly the each grow, will determine the relative percentages. But we plan to grow those 3 very, very aggressively. So we -- those 3 would take up a bigger and bigger share of the overall revenue pie.

Your next question is from Ielhaam Ismail from M&G Investments. The FX market liberalization, have you seen an improvement in liquidity?

And I think that's one is for Funke.

Fola. To be honest, we haven't seen much improvement in liquidity. But I think for us, our FX requirements are pretty limited. So we're not typically in the market for that. So it's not one that would materially impact our business in terms of seeing FX liquidity being available. I hope that addresses your question.

The next question is from Onome how asked, what was the source of the FX gain recorded during the period Onome wakes with Money Africa.

Okay. I'll say, look, this is one where we were to be lucky than smart. We, first of all, try to avoid foreign exchange mismatch. So we avoided all liabilities almost at all costs. But in the course of our business, we do require FX to buy plant and equipment, to import items, and we try to make sure that we have a bit of liquidity to do these things. So I think the avoidance of big FX liabilities and just managing our treasury to ensure that we're able to meet our needs. And I would add also that a very big focus on sort of localized supply chains is what resulted in the gains we have recorded in the first half of the year.

Your next question is from Wale Okunrinboye of Access Pensions. I think it's good to see numbers like this after all we see weak trends. Where do you see yourself in terms of your strategy when you took over UAC? It has been recent economic dislocation puts you all things related to your North Star. Secondly, I see UACN active in the CP market. How do you assess bank financing related to working capital financing for UAC entities? Third question, what is the play for your real estate over the medium term?

Okay. I think, firstly, thank you. Where do we see ourselves related to strategy. Look, it's fair to say that the last few years have been very, very difficult, and we know we anticipated macro conditions as difficult as those we've experienced. You may recall that at the very start of getting involved with UAC, we set ourselves sort of 3 broad buckets, people, improve the talent, quality and culture in the group structure, simplify the structure of the group and growth. And we are quite harsh critics of ourselves. So we still we have a lot of work to do, but we've also learned a lot in the last few years. From a people perspective, we've, I think, done a pretty decent job just in terms of strengthening talent, bringing through management trainees and betting culture, but we are not immune over immigration. So that work is never going to be finished. Structure, we've -- we're now minority in new UPDC. We sold our that control, a minority in MDS, we sold our control. So we've merged our Paints businesses. We've acquired 100% of our Food business. We've merged the subsidiary of the Food business with the Food business. So we've also made good progress. There's still more work that we're going to do with simplifying the structure of the group. So I'll say work in progress there. Growth, I would say, we've had a mixed record. But the companies that have been the call of our focus on aggressive growth area are Packaged Foods, Paint and QSR, I would say we've done a decent job. But it is crystal clear that the challenges we've recently experienced in the Animal Feeds business have almost overshadowed all the progress in those businesses. And so we need to answer our focuses on addressing those challenges. I think Funke will take the question about CP and bank financing. Our play for real estate is where minority [indiscernible] is doing a fantastic job of growing and managing that business where we try to be supportive partners. Over the long term, we would exit the business, but our focus is now is on supporting our partners custodian and continue to grow value in UPDC. And then for the real estate on our books, focus is to divest these things. They're noncore low-yielding and have a meaningful amount of operational intensity to keep the licenses, permits, idles up and running. So we're going to divest these things and we invest in our core. And -- but Funke can take the question around CP and bank financing.

Sure, it's relatively easy with response on this one. As a group, we try and get the best financing for group companies. And sometimes, UAC the holding company plays a role by sourcing better priced funding from the capital markets via commercial paper. And essentially, we just try and look at opportunities to refinance bank debt. So we use a combination of bank debt and commercial paper.

[ Sharuti Patel ] has another question. How much room do you have to increase prices? Any categories where it's easier or impossible.

[ Sharuti ]. I think I'll start with the second half of your question. It varies meaningfully by operating segment. So we are fortunate that in certain of our segments, so Packaged Foods, Paints and QSR, we have a very good market position. And so it's not easy but we generally move price and the industry follows -- it also, I think, a lot depends on the nature of competition within the industry. So for those, it's not easy, but not hasn't been a major headache. We are conscious that regardless of how strong the market position is or how sensible the company within the industry is, the consumer is stretched. So if prices have gone up 30%, 40%, 50%, and sales have not moved up, the consumer quite simply will not be able to absorb these price increases. So I think it's important to give that color. The industry are the segment in which it is by far the most difficult to move prices in the Animal Feed and Edible segment. And I think it's for a number of factors. One is the lowest margin and two is the segment in which you have several large players that don't have that huge difference in terms of our market size and position. But for the Paints, QSR and Packaged Goods, I would say not overly complicated, but not easy by any stretch.

Your next question is from Francis Daniels, who works with [indiscernible]. He has 2 questions. Could you give more color on your long dollar investment exposure and whether you intend to keep it at current levels or reduce it? Secondly, what are your long-term views on your Logistics investments, which seems to be growing on that current management?

Francis. I would say -- and I think I've addressed the dollar exposure. While I think we're more lucky than smart. We're not a hedge fund. So we're not trying to profit from taking to our positions. We will just keep on trying to avoid FX mismatches, so we will try to avoid the dollar liabilities and try to ensure that we have some dollars to meet working capital and CapEx needs. In some certain periods, we'll be lucky, like where we are now. I mean, if [indiscernible] appreciates us, some people expect, we may not be as lucky. But trying to make money of trading dollars is not by any stretch part of our business model. We are trying to invest to grow our operating segments and have quite frankly been lucky in this particular quarter. And Logistics, our partner this Imperial or now DP World. We are still very big minority shareholders. I think it's important to note that we both UPDC and NDS, we own 43%. We are very active on the board of those companies. And it is likely to that over -- at some point in the future, we will exit this business, but there's no rush. We -- on working with our partners to deliver value. So it's not on our radar, the day-to-day focus is on growing the business with our partner, DP World.

I noticed [ Sharuti ] and Mike's hands are still up. Are this for new questions or your old questions. Your next question Fola is from Manjunath of [ Temis Capital Management ]. What initiatives has the company undertaking to enhance the performance and offerings of UPDC hotels since it's reopening.

I'll say we brought in a gentleman called [ Shosha ]. He was the GM of the hotel several years ago and the time when the hotel was operating at its best and he now runs the hospitality consulting company to support us. And I think the focus has been very much on the basics, which is the quality of offerings to the guest of the hotel. So we invested in infrastructure, cooling, water, power, just to meet the base hygiene factors, I am pleased, and he's now launched several sort of micro initiatives. So trying to get particularly light the rational of the hotel to growing local traffic, which is then spread the word. The hotel is indeed back in operation and hopefully drive room rate. And then also do work with corporates, and it's one of the few hotels that have the scale to host big conferences. And I think that the broad base that have been done, and we hope will drive some benefit and value in that hotel.

Mike your hand is still up. Please unmute yourself and go ahead.

I'm sorry, I didn't have any other questions. Let me take down my hand.

[Operator Instructions] This ends the Q&A session. I will now hand the call back to Folasope Aiyesimoju for his closing remarks.

Thank you so much, Temitope. I think thank everyone for making time to participate in this call and to the insightful questions. And I wish everyone a wonderful rest of the day. Thank you.

That concludes the UAC of Nigeria PLC Half Year 2023 Results Call. Thank you for your participation. You may now hang up.