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

Good morning and good afternoon, ladies and gentlemen. Welcome to UAC of Nigeria PLC's Full Year 2023 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 question-and-answer session. I will now hand the call over to Fola Aiyesimoju. Please go ahead.

Thank you, Temitope, and good day all. I have lost my voice at the most inopportune time, but I will do my best to be audible. Please turn to Page 5. For the financial year 2023, UAC recorded revenues and profit before tax of NGN 120 billion [ 121 ] and NGN 12.3 billion, respectively. Our profits included one-off gains from asset divestments and our treasury portfolio. Over the course of today's presentation, we'll provide color on the operating environment in 2023, discuss the initiatives we executed over the course of the year, share insights on our financial performance and talk a bit about the outlook for 2024. Our performance in 2023, in spite of challenging conditions, reflected the strength of our brands and distribution, management team's risk management initiatives and capital allocation decisions. Please turn to Page 7. Operating conditions in 2023 were very difficult with low growth, currency devaluation, foreign exchange scarcity and high inflation. In addition to these, I'm sure we all recall the very challenging first quarter of the year, during which the effects of the attempted currency redesign program and election-related uncertainty were most acutely felt. The elections were thankfully successful and while we are by no means out of the woods as an economy, we're encouraged by the current policy direction. Page 8 reflects the impact of the inflation on our businesses with continued escalation of raw material prices as well as distribution and energy costs. Please turn to Page 10. Our primary focus in 2023 was on driving performance in spite of economic conditions. In addition, we executed a number of important initiatives. We merged and integrated Spring Waters Nigeria Limited, producer of Swan water with its parent company, UAC Foods so that business is now operated as a single entity. We unlocked NGN 9.2 billion by the sale of noncore assets to boast the group liquidity, which we feel is important given the current economic conditions. We appointed Oluyemi Oloyede as Managing Director of UAC Foods, and he has had a very good first year. Debola Badejo returns to the holding company to drive our investment efforts with Ufuoma Ogeleka being appointed as General Manager at UAC Restaurants. We streamlined group covenants and I now chair the Board of Directors of our businesses, CAP, Grand Cereals, UAC Foods and UAC Restaurants. On Page 11, we reflect our brands. We are firmly of the view that our performance, under very difficult conditions, is directly related to the strength of these brands in our portfolio. We had a very successful launch of a new sausage roll brand, Kingsway, which is trading strongly. Page 12 reflects our nationwide manufacturing footprint and distribution that supports our brands and these contributed to the improvement in key metrics reflected on Page 13. We recorded a revenue growth, gross margin expansion, improvement in operating margins across all our key segments. We will take the business specific updates on Page 14, as read, and Funke will run us through details on our financial performance.

Good afternoon, ladies and gentlemen. Please turn to Slide 16, which provides an overview of the group's financial performance. UAC Group recorded consolidated revenue of NGN 121 billion in 2023, which is 10% higher year-on-year from the NGN 110 billion recorded in 2022. Performance in the first half of the year was characterized by slower top line growth, which was impacted by limited trading during the general elections and scarcity of cash, which affected consumer demand. In the second half of the year, we recorded stronger performance across all operating segments and delivered double-digit growth in revenue, gross profits and operating profit. From a segmental perspective, our Animal Feeds and Other Edibles segment comprised of Grand Cereals and Livestock Feeds Plc recorded revenue of NGN 67 billion, and this increased by a modest 2% year-on-year, and was largely driven by price increases to offset rising raw material costs. Our packaged food and beverages business', UAC Foods, revenue was NGN 29 billion, which is 23% higher year-on-year. The growth was on account of higher volumes recorded in the snacks category which was supported by existing brands as well as the launch of a new brand, Kingsway Pastry Roll. It was also supported by volume growth in the Swan spring water category as well as price reviews across board. The revenue from our paint business, CAP PLC was NGN 24 billion in 2023. This is 24% higher year-on-year and was achieved as a result of the positive impact of the company's growth strategy on volumes as well as price increases. At our Quick Service Restaurants segment, it recorded a 21% revenue growth year-on-year, and this was driven by increase in sales from our company-owned restaurants. In terms of operating profit, UAC Group recorded NGN 9.1 billion in 2023 compared to an operating loss of NGN 2.4 billion in 2022. The improvement in profitability is attributable to three factors. The first is the top line growth across our operating segments. The second is the gross profit margin expansion, particularly at our Animal Feeds and Other Edibles segment and our Packaged Food & Beverages segment. The gross profit margin expansion was achieved due to deliberate cost saving initiatives implemented to reduce conversion costs and energy costs across those businesses. There was also a focus on operational efficiency initiatives, and this was aimed at limiting the impact of the higher distribution and haulage costs experienced during the year. And the third factor, supporting our improved operating profit, was the gain we recorded from the sale of noncore property assets. Across the group, our operating expenses were 17% higher year-on-year and this increase reflects the impact of inflation on our expenses as well as the effect of the naira depreciation on expenses that are pegged to the foreign currency. Our profit before tax was NGN 12.3 billion compared to the loss before tax of NGN 4 billion recorded in 2022. And this was supported by the improvement in our finance income and profitability of our associate companies. More specifically, the group recorded net finance income of NGN 2.4 billion in 2023, compared to a net finance cost of NGN 2.1 billion in 2022. Our finance income was positively impacted by higher cash balances as well as gains in the treasury portfolio. The share of profit recorded from our associate companies was 8x higher at NGN 860 million compared to the EUR 103 million recorded in 2022. This was driven by the expansion of MDS Logistics transport business as well as the profit recorded at UPDC Plc, our real estate business. We recorded NGN 3.8 billion in free cash flow and our return on invested capital for the year was 20%. Please turn to Slide 17, which provides additional context on the key drivers of operating profit in 2023. Our underlying operating profit when adjusted for the nonrecurring gain from noncore property assets was NGN 2.1 billion. And this is an improvement when compared to the operating loss of NGN 2.4 billion in 2022. The improvement was a result of the higher revenues recorded in our segments, the cost initiatives, which more than offset the impact of inflation across the group. Please turn to Slide 18, which shows a snapshot of the group's financial position as at the year ended 31 December 2023. The group has net assets of NGN 53 billion, which is NGN 8 billion higher year-on-year. The increase can be largely attributable to the higher cash balance, which was generated from the disposal of noncore assets throughout the year. Our net debt at the end of the year was NGN 2.2 billion. Total debt across the group was NGN 27 billion, and this amount is largely short term in nature and used to support working capital across our businesses, particularly the Animal Feeds and Other Edibles segment. We're conscious of the impact of finance costs on profitability, especially given the recent increases in the monetary policy rate and so continuously seek to optimize funding costs across our businesses. Across the group, our capital expenditure for 2023 was NGN 4.7 billion, and this was largely concentrated in the Packaged Food and Beverages segment. The investment represents the final phase of a bottling line that was installed to increase capacity of our spring water business in the first quarter of 2023. Looking at our cash cycle, this increased slightly versus what we recorded in 2022, and that is reflective of the increase in advanced payments at our various businesses to lock in favorable prices and to mitigate against the impact of increasing prices. I will now hand the call back to Fola, so he can take us through the next section of the presentation.

Thank you, Funke, and please turn to Page 20. We proposed a dividend of 22 kobo per share, the same as was paid last year and plan to hold our Annual General Meeting on the 20th of June. In conclusion, on Page 21, we expect economic conditions to continue to remain difficult over the course of 2024 and we'll focus on maintaining margins via supply chain efficiencies and proactive pricing. We'll seek to alleviate the impact of inflation on our employees by improving salaries and work conditions and ramp up our efforts to attract and develop leaders for our businesses. And thank you for listening to the presentation, and we'll now take questions.

[Operator Instructions] Your first question is from Chidinma.

My name is Chidinma, Portfolio Manager at Access Pensions. And I just have two questions. The first question is, with respect to the conversion costs at the Animal and Edibles segment, could you please speak more to actual cost management strategy that was implemented in the Animal and Edibles segment? And then the second question I have is, what is the percentage of -- if you could just help with the percentage of your raw materials which are sourced locally and the percentage of raw materials sourced internationally, across the business segments, just to get a picture of foreign exchange exposure with respect to raw materials?

Thank you, Chidinma. I think your first question was around efforts to reduce cost of the Animal Feeds business, and I think you specifically talked about conversion costs. But in addition to conversion costs, there was a change in the route to market that meaningfully reduced distribution expenses. From a conversion cost perspective, I'll say the 2 biggest things were: one, a change of energy source introduced in biomass to fire boilers, which is cleaner and cheaper than using diesel or heavy fuel oil. And the second was just very many small production efficiencies, shift management and sharing longer runs for bigger SKUs and the like and these several incremental gains resulted in the overall improvement in conversion costs. So your second question was around percent of raw materials sourced locally. I would say that, by far, the bulk of our raw materials across the group are sourced locally. I think it's important for you to note that some of these raw materials are imported, and we buy them from domestic companies, but we do very, very little import. And the only business that does meaningful importation of raw materials is our paint business, and there I'll put the number at around 40% or lower. Chidinma, I hope that [indiscernible].

Your next question is from [indiscernible].

[indiscernible] I'm an analyst with Money Africa. So I have a couple of questions. One, for your QSR business, I'd say in line with increased costs everywhere, do you have a time line for when you break even? That's one. And do you have an update on, I know at the last call, you had a number of restaurants you were looking at opening, can you update as to how many were opened last year and how many you expect to open this year, that's for the QSR? Two is for the paints business. I also remember, at your last call, there was to be an expansion, I believe, into [indiscernible] paint line that would generate effects. So is there any progress for that? And what are the plans for the current financial year? And three, for the foods business, what's been the response of the market to the new products, that's one? And are you -- how are you managing the cost pressures generally? Are you facing pressures from the commodities side of things for the foods business and for the feeds business as well.

I have three questions. On QSR, what is the time line to break even? And how many -- what's the outlook for opening restaurants. And for paints, what our efforts to generate FX income. And for the food business, market response to new product and how we're dealing with commodity -- with raw material cost increases. Are those -- [indiscernible] your questions [indiscernible]?

Yes, you do. Yes.

Okay. For the Quick Service Restaurants business, we have about 30 restaurants open currently. And there are two formats, they are what we call the big corporate stores and then they are the express stores. Our plan last year was to double that footprint, but we meaningfully slowed down our pace of expansion. And this was tied to, I guess, the first point you raised, which was meaningful escalation in costs, in particular, energy costs. And we thought it was important to get a firm handle on the stand-alone economics of each store before continuing to accelerate the pace of store openings, which we're doing. Do I have a time line to breakeven? We have a target to break even and we're hoping to get this business at or close to breakeven within the next 12 months. And to achieve this, we would need to do two things. One is implement some of the initiatives that we've put in place to manage energy costs at the restaurants. And two, we think we still need to at least double the footprint of profitable stores to get this to breakeven. On the Paint business, there are two avenues for us to generate foreign exchange income. The first and easier is to scale our Marine and Protected business. We have a business that has been so far, sort of, played second fiddle to the decorative business. And last year, we got full accreditation from the Nigerian Content Development Board, and that should meaningfully improve our ability to expand our offering in the oil and gas sector. This is an FX-linked business. And then we've recruited an individual to begin efforts to try to export product in the region and the person we recruited is currently based in Cameroon. So that's the secondary thing that we are going to try to grow some FX income from the Paint business. And on the food business, the new product we launched was Kingsway Sausage Roll. I need to credit Oluyemi and his team. I think it's trading far ahead of my expectations. As we know, Gala is a clear number one, and Kingsway, which was launched, I mean, just about 6 months ago, in some months already begins to occupy the #3 position in the market. So it's trading very, very well. And I think it's a testament to the effort of Oluyemi and the team at UAC Foods. We see price escalation everywhere, across our businesses, you spoke about food and feed in particular. But [indiscernible] is we're very disciplined around pricing and protecting our naked margin, which is the sort of selling price minus material costs. And I think those efforts have so far translated into the improved profitability we recorded last year. And we continue to keep our eye on the ball to maintain this pricing discipline going forward. And you recall when I went through the presentation that I think the underline -- the foundation for this improved performance was the strength of our brands and distribution. And there's no way you can effectively dictate pricing if you don't have, sort of, the kind of market-leading brands and nationwide distribution reach that we do.

Your next question is from [indiscernible].

Yes. Sorry about that. I wanted to ask about the profit on property sales. I noticed that you've made a considerable amount to the bottom line. Could you please shed some light onto that -- sorry, [indiscernible].

Very clear. Funke, do you want to take that question?

Okay. Thanks. I got the question. I think you asked about more information on the property sales. And I think you would have also seen in our results last year that one of our strategic initiatives is to essentially exit, what we consider, noncore assets. And noncore assets are certain properties that UAC holds across the country. So in line with that strategic initiative to unlock liquidity from low-yielding assets, we embark to sell some of these assets, and that's the one-off profit you see in 2023.

Your next question is from [indiscernible]. He asks, how does the business plans to mitigate the challenges posed by FX this year? And please, can you give more details on expansion plan for the paint business, margins declined in 2023 when compared to 2022?

Okay. In terms of dealing with FX challenges, I think we -- there are two things that are within our control. One is continuing to try to find sort of alternatives, raw and packaging materials at lower costs, and we had some success with that over the last 12 months. And the second is to be disciplined around pricing. I think the important thing for us is that given our position in our various markets where we're the -- mostly the market leader where we play, anything that affects us affects the rest of the market. And so we found that once we've been disciplined with pricing to maintain margin, we've been fine in terms of generating profitability in spite of rising FX. So we wish it was more stable, but we try to manage it by looking for alternatives and having pricing discipline rather. And Paint business, yes, the margins were low last year, but if you follow that business, you could see that it is growing extremely fast. It was a business that was sort of flat in revenues for about 5 years and has probably tripled in size over the last 3 years. And this requires meaningful investment in distribution, a couple of centers and the sales force to manage that increased retail footprint. And then there's a lag between investing in this improved reach and the profitability coming through. And we continue to expand that business very aggressively over the next few years because we see that there's -- we believe there's still opportunity for us to take.

Your next question is from Sunmisola, who works with CSL Stockbrokers. Sunmisola wants to know if the company is in a position to earn more from its exchange gain in 2024. She also wants to know if volume of production has been affected by the increase in commodity prices?

So the short answer on whether we would earn more exchange gain this year. I don't know. We don't -- we're not a financial institution. So we don't think about foreign exchange as a profitable center. We try to make sure we have enough to meet our procurement needs for technical, raw materials, new plants and equipment and so on and so forth, and which I keep stressing how we make sure we price when the business of selling consumer goods profitably, make sure we price those profitably regardless of the FX regime. So we think about this more from keeping our business growing and risk management, and trying to make money out of FX is not our core job. Around volumes, we have been surprised that over the last 12 months, where we've increased prices meaningfully in response to rising commodity prices, we've seen volumes hold or increase across our Paints business, across our foods business. And the one area where we saw dip in volumes was in the Animal Feeds segment of Grand Cereals and in the Edibles segment, we saw massive growth in volumes. And that, I guess, is a combination of much higher prices as well as the challenges you'll have read about in the Nigerian poultry farming industry.

Your next question is from [indiscernible].

[indiscernible] Securities. I would like to ask, want to ask, with regard to your [indiscernible] segment, I know that, that segment has been pretty challenging [indiscernible] down. And if you're looking at the revenue performance, it has been [indiscernible] declining for the past 2 years. I think this year, [indiscernible] somewhat 1.5% growth [indiscernible] segment. And that constitutes [indiscernible] the major part to turn revenue [indiscernible] company's plan on that particular segment? What are we trying to do to boost performance and increase profitability, and I think the second question is [indiscernible] on the FX. I know you just mentioned [indiscernible] about that particular aspect. I mean, it was a major contributor to bottom line in 2023 and for 2024, are we expecting that much or more [indiscernible] FX gains [indiscernible], are we expecting that significant [indiscernible].

I think on feeds, you point out that revenue growth was slow, but you would see that the swing in profitability of the feeds business was quite meaningful. And I think it's because of an increased focus in that segment, on driving the higher-margin part of the business. So we're not trying to just grow scale in the feed business for the sake of scale, we're trying to drive profitability. And to do so, I think the highest margin segment of our -- because in Feeds and Edibles business, we've historically, I think, largely focused on the Feeds side, is by growing the Edibles which is pure soya oil and our cereals in that business. And also, even within the Feeds segment, there are higher margins if you focus instead of the higher-quality feed niches, you would have lower volumes but higher margin. So I think our focus there is not on volumes or revenues, our focus is on profitability. And so far, we've seen those results come through and that is going to be our continued focus in the near future. On FX, I think what we tried -- what we successfully did in 2023 was avoid losses. So we tried to almost under no circumstance keep foreign exchange liabilities. And we tried to get foreign exchange to buy the things we need to buy. So I don't have a better answer. We don't budget or plan or strategize to make FX gains. We just -- we try to avoid losses, which is risk management, and try and make sure we have enough for what we need and price to make money regardless of whether or not the FX is NGN 1,000 or NGN 2,000 to a dollar. So I'm sorry, I don't know the clear answer, but we don't run -- we're not running a hedge fund. We don't run to make money on FX. We're trying to avoid losses, but try to make money from FX.

Your next question is from Dean.

My name is Dean Tlotleng, an analyst from Steyn Capital Management. Thank you for hosting this call today. I have three questions from my side. There's been some recent strength in the currency from about NGN 1,700 to about NGN 1,300 and there's some news as well that the queue has been cleared. My question is, have you been able to source FX? And are you able to access this FX market. Second question is what part of -- which of your businesses are you most positive about for 2020 and beyond and why? And third question is, you likely touched on some of the things you've done to simplify the group's structure. Can you sort of give us an idea of what further plans you have for 2024 to further simplify the structure? And just last question from my side is what currently -- what are you currently seeing on the ground in terms of the Nigerian consumer?

Okay. Thank you, Dean. I think your first question was around what we're seeing around FX and ability to source. I would say because the market has been somewhat liberalized, yes, if we bid for FX at the right rate, we get. So we have seen a meaningful improvement in FX liquidity, experienced on the ground here. The next was, which of our businesses are we most positive about. And that is a quite impossible question to answer. What we do is we sit with the management teams of our respective businesses, and we work with those management teams to develop strategies that we're excited about. And the outcomes depend very much on what happens in the environment and the quality of execution. So we're excited about the strategies that are in place for each of our businesses. The challenge is to work with the management teams or support the management teams. I think they do most of this stuff on their own, to execute their strategies. And I hope we don't get too many -- we get some tailwinds and not too many headwinds from the operating environment. In terms of simplifying the group's structure, it is not an event. It's something that is going to be constantly at the forefront of our minds, which is how can we organize ourselves to be simpler, simpler, simpler. We don't have anything specific to announce now. We're a listed company, so if we were going to make an announcement, there's a procedure we need to go through. But simplifying the group's structure is going to be -- is core to the way we run the business. So it's not a one and done. The Nigerian consumer is stressed but I would say that, for me, the biggest takeaway from the current environment is surprised at the resilience of the consumer. So we see a meaningful disconnect between the expectation of what the consumer should be doing and the experienced reality on ground, which I think is testament to the resilience of that consumer.

Your next question is from Chidinma, who asks, do we expect to see more of this sizable strategic sale of noncore assets this year and beyond?

So I think I'll link the response to what I just responded to Dean, in that, sort of a core part of our strategy, one of the things we spend time on at the holding company is capital allocation, which is thinking, where is our capital currently concentrated and is there rationale to move that capital from in particular use to what we feel, is it reused and gives us a better risk/return outcome. Last year was real estate. It was not an operating company. So it was noncore real estate. We don't anticipate any similar moves from a noncore real estate perspective. And while we continue to work on the rest of the group and ask the question continually, where is that capital tied up and then -- is there scope to reallocate this capital.

There are no more questions. I will now hand the call back to Fola Aiyesimoju for his closing remarks.

Thank you, Temitope. I thank everyone for participating in the call and for the questions, and I wish you a wonderful rest of the day.

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