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 2024 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, Cynthia. Good afternoon, and thank you for joining our results call for the 2024 financial year. As Cynthia mentioned, Funke and I will go through prepared remarks, but make sure we leave enough time for Q&A at the end. We will try to cover the operating environment in 2024, initiatives we focused on, our financial performance and our outlook for the business. We will also touch on topics that we know are important to you, including the decision around our dividend and the road map for our restaurants business. We won't follow the slide deck verbatim, but we will reference slide numbers at the top right of this page for ease of navigation. And please now turn to Slide 5. A few years ago, we outlined our strategy for UAC anchored on 3 pillars: people, structure and growth. Having made significant progress on talent acquisition and culture, foundational IT infrastructure and group simplification, which are key elements under our people and structure pillars. In 2024, we focused on delivering operational performance and growth. This focus translated to strong results. Revenue grew 63% year-on-year, nearing NGN 200 billion and underlying operating profit grew nearly 9x. Funke will dive into the numbers shortly. Several factors contributed to this performance, but none more important than the hard work, talent, creativity and dedication of our colleagues across the business. Together, we anticipated higher inflation and positioned the business to deliver growth without margin erosion. This required precise execution across pricing, product mix and innovation. We also focused on operational efficiencies and passed on savings to the consumer where we could. Our technology investments are paying off. We have greater visibility of our business, increasingly standardized processes, improved accountability and simpler tools to help people get things done more effectively. We remain mindful that economic reform in Nigeria, while welcome, would bring short-term volatility, so we work to protect our balance sheet. Talent immigration and competitive labor markets remained a challenge, and we focused on investing to retain and develop our people. Slide 7 outlines the macroeconomic backdrop that we operated in 2024 and it was marked by a rapid change. Inflation rose from 24% at the beginning of the year, which is already elevated to 35% by the end of the year. Interest rates rose to combat inflation and the naira divided approximately 70% against the dollar. These dynamics are difficult to manage, but we took into account that they stem from necessary reform that we firmly believe laid the groundwork for a more stable and promising economic outlook. Slide 8 shows key input costs, many of which rose well beyond headline inflation. And with this context in mind, we'll move on to the highlights from the year, and these are -- they start on Page 10. As a refresher, particularly for new participants on our calls, UAC is focused on the domestic production, marketing and distribution of branded consumer goods in Nigeria. We own some of Nigeria's most iconic brands and enjoy distribution scale with millions of units of sales daily. This brand strength -- and reach form a defensible moat and were critical in navigating the challenging environment. On Slide 11, we outlined our focus on protecting margins. We believe that profitable capital-efficient growth depends on healthy margins, and so margin protection was a key focus for us, and we took a multifaceted approach. We are laser-focused on pricing. We worked hard to broaden product offerings to provide the consumer with affordable options at the right margin. We targeted underserved markets, and we drove operational efficiency, particularly around energy usage, and we closely monitor energy consumed per unit of output and explore cleaner, lower-cost energy sources. And thanks to these efforts, we were able to deliver meaningful salary increases to our colleagues without compromising margins. We also managed the balance sheet carefully, avoiding foreign exchange mismatches and optimizing borrowing costs, including tapping the capital markets alongside traditional bank financing. Slide 12 details key initiatives across the group. And UAC Foods was successful with launching 3 new products tailored for growth in a tough environment. And at CAP, growth was driven by a combination of meaningful retail expansion as well as growing the mid-tier portfolio. We strengthened internal controls, fully transitioning to an in-house internal audit function. Talent remains our greatest asset, and we launched the UAC Academy to groom future managers. We entered into a partnership with Oxford University and the Nigerian University of Technology and Management to develop our senior leaders and launched the UAC Excellence Awards to recognize our top performers. We're especially proud of our in-house technology hub, which drives innovation across digital technology, business communication and optimization of our ERP system. Slide 13 shows new product launches that I just talked about, while Slide 14 just shows images from our expanded paint factory and the new color center, both of which are aimed at driving efficiency and growth. And please turn to Slide 16. The combination of these efforts delivered the 2024 results, strong revenue growth, margin expansion and meaningful increase in profitability. Funke will now walk us through the financials in more details.

Thank you, Fola, and good afternoon, ladies and gentlemen. Please turn to Page 18, which shows the highlights of the group's financial performance. As Fola mentioned, UAC Group recorded very strong results in 2024, which are a reflection of the performance of the businesses across our group. Our consolidated revenue of NGN 197 billion in 2024 is 63% higher than the prior year. Operating profit of NGN 19 billion is 9x higher than 2023. Earnings per share also increased materially to [ 497 kobo ] from [ 314 kobo ] in 2023. Free cash flow improved to NGN 2.1 billion and return on invested capital rose to 33% from 20% in the prior year. Please turn to Page 18, which shows an overview of the group's income statement. Supporting the 63% increase in top line growth were our core operating businesses. Our Edibles and Feed business grew 54% to NGN 103 billion. This growth was due to price increases implemented to offset rising raw material costs. Our Packaged Food & Beverages business revenue doubled to NGN 58 billion, driven by an average volume growth of 46% across the 3 categories: snacks, spring water and dairy. And this was supported by the strength of our existing brands, the launch of new snacks and dairy products as well as price reviews. Our Paints business revenue grew by 52% to NGN 36 billion and was achieved as a result of the company's strategy to strike the balance between pricing to protect margins and ensuring adequate volumes. The Quick Service Restaurant segment's revenue declined 32% to NGN 2.5 billion, and the performance is reflective of 2 things. The first is our strategy to rationalize unprofitable stores and the second is the impact of the high inflation on the discretionary income of consumers. Our gross profit margin improved, supported by the dynamic pricing strategy adopted by our businesses to protect margins alongside production efficiency and cost-saving initiatives, particularly in reducing conversion costs and energy costs. Across the group, operating expenses were NGN 30 billion in 2024, and this was 51% higher than the NGN 20 billion recorded in 2023. The increase reflects the impact of inflation on operating costs as well as the effect of the naira depreciation on expenses that are paid to the foreign currency. The most significant increases across the group were personnel costs, distribution expenses and electricity and power costs driven by higher electricity tariffs, increased fuel and diesel prices and cost of living adjustments for employees. Despite this, the operating expenses to sales ratio decreased by 126 basis points year-on-year from 16.8% in 2023 to 15.5% in 2024, and this reflects the improved efficiency in business operations. Despite these inflationary pressures on input and operating expenses, UAC Group recorded NGN 19 billion in operating profit, which when compared to the underlying operating profit in 2023 was 780% higher. Net finance income of NGN 5.9 billion was recorded in 2024, and this was positively impacted by higher yields on investments and gains in the Holdco's treasury portfolio, which offset the increased borrowing costs incurred during the year. Share of profit from associate companies was NGN 723 million, down from NGN 860 million in 2023, mainly due to the high operating cost environment. Although UPDC and MDS Logistics grew revenue, profitability was affected, particularly at MDS, where rising costs outpaced top line growth. Profit before tax rose meaningfully over 6x to NGN 26 billion in 2024, compared to NGN 5 billion in the prior year, and this reflects a strong recovering operating performance and improved earnings across the group. Please turn to Page 20. And this slide shows the split of our operating profit, and it reflects that our earnings are well diversified across our businesses with meaningful contributions from core segments. Please turn to Page 21, and this shows an overview of the Group's financial position as at 31 December 2024. We closed the year with a net debt position of NGN 890 million, an improvement from NGN 2.2 billion in 2023. This reflects the total debt across the group of NGN 41.5 billion and our cash of NGN 40.6 billion. Our debt profile remains largely short term in nature and is primarily used to support working capital needs, particularly within the Edibles and Feed segment. We remain conscious of the impact of finance costs on profitability, especially in the context of the high monetary policy rate and continue to actively manage and optimize our funding structure and costs. In 2024, the holding company accessed the capital markets, issuing commercial paper and a 7-year corporate bond at 21.5% to refinance existing debt and reduce finance cost pressure for subsidiary companies. Capital expenditure of NGN 5.2 billion incurred across the group in 2024. The spend was broadly evenly split across our businesses and was largely focused on maintenance and efficiency-enhancing projects aimed at replacing and upgrading existing assets to support operational continuity and cost management. For the Paint segment, the key investment was the extension of the automated paint line, which was a key contributor to production efficiency in the last quarter of the year. Since the extension of the automated line in September, CAP PLC has been able to improve the lead time to produce paint. For the Packaged Food & Beverages segment, the key investment was to upgrade the Swan bottling line and also install gas infrastructure at the dairies factory in Oregun, Lagos and this was part of our energy diversification strategy to optimize energy costs by leveraging a more cost-effective fuel mix between gas, diesel and power from the grid. The Edibles and Feeds segment focused on the construction of a new warehouse in Sagamu to address long-standing space constraints and to reduce third-party storage costs as well as office renovations. Our cash conversion cycle increased to 106 days in 2024 from 83 days in 2023, primarily due to a deliberate buildup of inventory in our Edibles and Feeds segment. This was a short-term buffer to mitigate against supply chain risks, particularly in a high inflation environment where input costs were rising. While this strategy increased our inventory days, we improved receivables and extended payables, reflecting continued discipline in other areas of working capital management across the group. This is the end of the financial highlights. So I will now hand over to Fola to take us through the next section of the presentation.

Thank you, Funke. And please turn to Slide 23. Here, we outline our dividend proposal. And in trying to decide on a dividend to propose to shareholders for approval, it was a very difficult set of discussions. And what I'll try to do is share our thinking. At UAC, shareholder value creations are North Star. Many of us in management are shareholders ourselves, and our long-term incentives are tied to shareholder returns. And that said, we try not to shy away from difficult decisions if we believe they are in the best interest, long-term interest of the company and its shareholder value creation, even where these may be unpopular in the short term. And in hindsight, some of those calls have proven to be correct, clearly not all of them. Those who have followed us for a bit longer would recall that in evaluating dividends, we try to -- we consider stability. We don't want to have dividends moving up and down the place. And we previously shared our approach to maintain a stable payout at 22 kobo per share unless a change was justifiable and sustainable. In looking at our 2024 performance, we're very confident that a higher dividend can be established and maintained, which brings us to the second one nuance factor in trying to determine the appropriate level of dividend to recommend, which is our investment pipeline. And where we see compelling opportunities to reinvest at attractive returns, we will pursue them, and we believe current conditions may present opportunities and preserving cash gives us flexibility to act decisively should these emerge. So this was the thinking that we tried to balance and recommend to cover share dividend in spite of our meaningful growth in profitability. On Slide 24, we just talked briefly on our outlook. We remained very growth focused and increasingly optimistic about improving economic conditions. We continue to invest in technology, building on our recent efforts. A question we get often, and we haven't really addressed in the slide deck is the plan for our restaurant business. It remains challenging and loss making, largely due to its subscale nature, and expansion has been slower than planned. We continue to strengthen the [ leadership ] of the business and be thoughtful around new location rollouts and shutting down underperforming ones. And that said, we're mindful, not to over allocate executive management time to this business. And looking back at 2024, we're happy that our focus on operational execution and growth came through in the financial performance, and we intend to remain -- retain this focus going forward, whilst keeping an eye out for attractive opportunities that we think would add value to the business in the long run. And thank you, and we'll now take questions.

[Operator Instructions] Your first question is from [indiscernible].

So a quick question from me. Please, can you give us updates on your paint business? I know -- in previous calls, you did mention of the paint business able to generate FX due to some of its products. I think some of its products among the shipping line and also trying to establish a footprint across some West African countries. Is there any update on that?

Thank you for the question. The paint business has 2 opportunities for -- to generate FX income. The nearer-term, is it's Marine and Protected business, which sells primarily into the oil and gas industry. It's a relatively small part, say, about 5%, 10% of CAP's business, but one that is a core focus area and growing. So that's doing well, and we're excited about the prospects there. As regards expanding regionally we chose Cameroon as our fist port of entry for a better expression. We have a team that we've put there. We started exports from Nigeria, and we're in the process of incorporating an entity there. So work is moving at speed, perhaps a bit slower than I would have liked, just given the need to set up properly in the country, but the near-term opportunity is going to come from scaling the Marine and Protective business.

Your next question is from [indiscernible] from Green [indiscernible] Research. She wants to know, are you considering a dividend payout during the middle of the year?

The short answer is we don't know. I think we strike the balance between returning cash to shareholders and invest in. We have made a dividend proposal now because we feel that there are more opportunities that are emerging, and we need to preserve maximum optionality to exploit should they come through. We hope we're successful. But if they're not, then we have to evaluate our cash needs relative to investment opportunities and make decision there, but nothing has been decided around what we may or may not do regarding dividends in the future.

Your next question is from Akhona from Steyn Capital, who wants to know, can you -- who wants to know if there is any segment within your business that you are most excited about. Who wants to also know if you have any CapEx plans across the business segments, and also wants to get a sense of what you think Nigerian customer -- consumer demand is like?

I think the last one is probably the hardest one. I think the Nigerian consumer demand is changing and it depends on what time frame you look -- you framed the question across. If you take sort of a 5-year view, the first 3, 3.5 years of those 5 years, I'll say consumer demand was -- consumer purchasing power was declining. Now given that what we sell are basic goods, people will still eat and build homes and so on and so forth. So what you have seen was down trading. And in some cases, nonconsumption but for the kind of things we sell, people typically consume them even in down economic cycles, which is why you've seen that we've grown. I would say over the last 12, 18 months, we've seen sort of almost refleeting of consumer spending power, and this is the positive trend that we hope to see continue going forward over the medium term. We have 3 big segments. We have our Edibles, Food segment, Agro Allied or Animal Feed segment and our Paints and Durables segment. You would have seen from the detail Funke had run through that they're all growing very fast, both top line and profitability. So it's difficult to say which one, they have great different characteristics. The Food and Agro Allied have much bigger market opportunities, Paints, much higher profitability and return on invested capital. They also behave differently on the different economic circumstances. So we like the diversification that they bring, but they all are performing well, and we think they have done exciting opportunities. In terms of CapEx, the business that is -- it varies. You have -- I'll split it in 2. We have a sort of regular, almost call steady state CapEx rolling out call centers, replacing equipment, adding packing lines and so on and so forth. And that happens relatively evenly across our businesses. The one which based on its growth is demanding the most consideration for a disproportionate share of CapEx is our food business, just given how fast the volumes they are growing.

Your next question is from [indiscernible] and he wants to know if you plan to unlock value by making a special exchange listing for Grand series?

That is currently not under consideration, no.

Your next question is from Damola from Meristem Securities. She asks, in the next 4 years, what should we expect from the QSR segments, especially in light of the economic environment?

The answer in a 4-year period will depend very much on our ability to execute our strategy. So -- we found it, although it's a very small business that when you get an individual store right, and the economies are quite attractive for the individual store. And given our view that we think sort of the decline in consumer purchasing power has at least stopped and perhaps turned. We expect to see a bit of a tailwind in the business that you can argue probably be on the more discretionary side of our portfolio. We have funding. We have -- we got a concessionary loan to roll out stores in this particular segment. So there is capital there ring-fenced for this. But we'll just been very, very thoughtful about where we put those stores and ensure that they perform. So I think the market opportunity will be there and probably get better. The question is whether -- it's how well we execute.

Your next question is from [indiscernible], who asks in which part of the business are there acquisition opportunities?

First of all, when I said opportunities for growth, it may not necessarily be acquisitions, some of them may be organic. And I will say I'll tie this very much to the question asked earlier about which segment I'm most excited about? We see opportunities across all our 3 big segments, Agro Allied, Food and Paints or Durables. And so what we do is just try to be really rigorously and diligently evaluate these and figure out which have the highest risk-adjusted return, and that's where we deploy our capital.

Your next question is from [indiscernible] from Themis Capital, who wants to know -- given the high inflation rates of -- inflation rates of the naira, what precautions are you taking to mitigate its impact?

I would say a number of things. One is -- well, the overall impact of inflation, I mean, is reducing our earnings in real terms. So we have to grow. We have to try to outgrow inflation. We have to be very, very careful about the margins. So whether it's product formulations, stripping out, looking for efficiencies and pricing. So we double all of these 3. And because the Central Bank response will be to try to raise rates to bring down inflation. We also have to very, very thoughtful around and finding the most attractively priced capital we have when we need to get external financing. So I'd say a combination of these things, we juggle constantly.

Your next question is from [indiscernible] from Access ARM Pension and he writes, I am not sure if you spoke about it, but can you explain the idea around the declared 22 kobo dividend. The market is not taking it well. Secondly, can you speak on your next UAC position and how you see FX playing out this year?

Okay. I did speak about this, but it was a bit earlier in the conversation. And I'm not sure if you recall that we sort of communicated an approach to dividends of setting a level and maintaining that level until they change. What we didn't want was 22 kobo [indiscernible] so on and so forth. And I think we said this a while ago. Looking at where we are today, where the business is relative to where it was at the time this was set, I mean the profitability and scale have increased meaningfully. And so we are comfortable that the business can maintain and sustain a much higher level of dividend than we have recommended. I also stress that we're not cash orders, where shareholders ourselves were driven by shareholder return. But we feel that given our view on where the macro is, they are going to be very interesting opportunities in the near term. And we feel that although we may sacrifice sort of short-term cash return, should we be able to act decisively if one of these opportunities come our way. And in the end, result in much larger shareholder return. So it's one that we spend a lot of time. We spend a lot of time thinking through. But that's the thinking behind it. I will attempt on net [indiscernible] position, and Funke please jump in if I misspeak. The first thing is we do not have any foreign liabilities. So we have only one [indiscernible] position that' going to net it off. And if memory doesn't fill me across the group, we have between $16 million and $18 million, but there's nothing to net it off because we don't have any liabilities. We are -- I don't know, we were not a macro house. I don't know what FX will do. I will say that as an operator in the economy, we have a better feeling around overall macro, and we see it beginning to creep into our numbers. Now how that translates into a specific FX rate. I don't know. It's not going to be spent a lot of time trying to model in any fine degree. We will maintain the discipline that we've maintained until now. We will not tolerate FX mismatches. We will try to make sure we have enough foreign exchange to meet our needs, plant equipment, inventory. But we are beginning to see, and I'm increasingly confident that the overall economic outlook is improving and continue to do so.

[Operator Instructions]

Akhona, I see you have a question in the chat. I'm not sure what holdings you're referring to? So you can please clarify?

You have a question from [indiscernible] who wants to know what is the level of your spending on R&D?

[indiscernible], this is one where, I guess, if you reach out, we can give you more specific details. But we're -- we're fully focused on investing for growth across all our businesses, and it's different things. In Paints, we will be developing offerings for the mid-tier. Foods is constantly tinkering probably 4 or 5 products launches in the last 18 months. And in Feed, a lot of investment in performance and the Feed business have decided to focus on the sort of performance segment of the market. And the exact figures we can -- if you reach out to us, we can provide you with those. And I see Akhola, you've clarified your question, which is CAP separate listing. No immediate plans around the group structure. We did quite a bit of work about 3 or 4 years ago about group structure, and we've shifted focus. We've sort of slightly tilted towards growth and official execution. There are opportunities around further simplifying the group, but nothing that we're working on imminently.

Your next question is from [indiscernible] who wants to know, what were the main energy initiatives implemented by the business to cut down over our operating costs?

It's a list of very, very small things that in some cases, result in a halving of the energy consumed per unit of output. So the choices of motors you use, the length of runs you have on your equipment, the culture to avoid energy waste, heat sources, cooling sources. So it's a list of very, very many small things and it doesn't drop in 1 day. So I would say that in areas we have seen a meaningful reduction in the units -- energy per unit produced, you see drop sort of month-on-month an 18-, 24-month period, but it's very -- very many small initiatives that need to meaningful outcomes.

Your next question is from Itika from [indiscernible], who asks, do you think your present net profit margin is okay? What are your plans going forward to improve it?

We're constantly working on improving margins, but we think our margins where they are decent. So I'm not expecting -- given the current mix because the business mix changes, you see the margins move quite a bit. But we think the margins are decent and we're constantly working to improve this. And I think the biggest drivers would be as we continue our focus on sort of pricing and pricing product innovation and taking out cost efficiency, you see the margins continue to hit in the right direction. And the second is scale. One of the things I should point out is as we grow quickly, we spread our cost base over a much bigger revenue, and that also drives margin improvement.

Your next question is from Damola from Meristem, who asks can we get details of your volume growth across the segments?

I'm not sure we disclosed that. But again, Damola you can sort of email -- you can reach out to us so we can reach out to you, and we'll see what is possible to share. We just want to be very careful that we don't give out too much competitive information that can be -- that our competitors can pick up. But overall, I would tell you that our growth last year was mostly a combination of both volume and price growth. The area that I would say had sort of the weakest growth was the Animal Feed segment because of a deliberate strategy to focus on the high-performance feed section. But the rest, you would have seen both volume and price growth.

[Operator Instructions] Your next question is from [indiscernible] from Access ARM, who wants to know if you can speak on the drive to increase export share of revenue? And what are the plans being taken to achieve this?

I'll say this is still in very, very, very, very early infancy. And I would say for 2 reasons. One was about maybe 24 months ago, we would have maybe over weighted this. But like I mentioned, we've seen a reflation, that's bottoming, I don't know, opportunities here and a lot of what we've delivered was on making sure we didn't take our eye off the balling what is still a very large and meaningfully underserved market in Nigeria. We have initiatives on the go to export things like snacks, to export things like Paint, but I don't expect those to be meaningful contributors to the group in the near term. But they are on the go, sort of export licenses have been obtained in one set for the Paint business and entity has been established. But I would think about those as long term, things are in the long term versus things that are going to have a very meaningful reporting impact in the near term.

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

Thank you, Cynthia. And I thank everyone for the active participation in today's call and for the questions. We appreciate your steadfast support, and I wish everyone a wonderful rest of the day.

That concludes the UAC of Nigeria Full Year 2024 Results Conference Call. Thank you for your participation. You may now hang up.