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

Good morning and good afternoon, ladies and gentlemen. Welcome to UAC of Nigeria PLC Analyst and Investor 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 day, and thank you for making time to participate on this call, which is focused on providing insight on our recent acquisition of CHI Limited. I'd like to start with an apology. We should have done this much sooner. Funke and I will adopt a slightly different approach to the format used on our earnings calls and spend a bit more time going through prepared materials. We would aim to leave sufficient time at the end to take questions. Over the course of today's presentation, we will cover the strategic rationale for the acquisition, provide an overview of CHI Limited, share transaction highlights and conclude with our post-acquisition outlook. If we had to summarize the entire discussion in one slide, it is to say that we acquired a wonderful business at a fair price and one that fits perfectly with our strategy. In shedding light on the CHI acquisition, we start with answering the questions, why CHI and why now? And there are 4 separate components to address. Our preparedness, the rarity of the opportunity, timing and fit. We start with preparedness. We felt we're ready to pursue and execute a transformational acquisition and set this out as a corporate priority. By far, the greatest source of strength and confidence to embark on an initiative such as this is the depth and quality of the management team at UAC, which balances capabilities in commercial and operations with finance, governance, risk management, controls and technology. The idea of the acquisition would not have been possible without this team. Following management and in no particular order of priority are the investments we have made in technology, which provide a platform to run businesses at scale. We have strong foundational technology with SAP S/4HANA as our core ERP system and cloud-based Microsoft applications. We also have a dedicated technology hub that develops bespoke solutions to support our business needs. We have devoted time to establish a set of management practices applicable to the manufacturing, marketing and distribution of branded consumer goods. These practices further bolster our ability to manage at scale. Crucially, we have strong risk management capabilities. We view risk management as foundational and without which scale becomes dangerous. Our efforts are overseen by strong experienced, dedicated and independent Board of Directors. Our Board holds us accountable and yet provides us the space to take measured risk. Our approach to managing brands and value creation is anchored on consistent product quality and availability, which is supported by slick operations. These are the foundations on which all else is built. This approach has delivered solid results with our operating earnings growing 44% annually in naira and 9% annually in dollars over the most difficult operating conditions in Nigeria's recent history. It is important to note that these numbers do not include the CHI acquisition on a pro forma basis. UAC's operating performance is increasingly reflected in our share price, which has outperformed the -- all Share index and the consumer index. The second key element of the why CHI, why now questions relates to the rarity of the opportunity. CHI has over 45 years of heritage and only one prior ownership change. As such, it was for us now or who knows when. Next comes timing. We feel our investment was made at a good point in the cycle, and this slide shows long-term enterprise value to EBITDA multiples, a proxy for valuations, which are currently below long-term averages. We also believe we are positioned to benefit from recent reforms implemented by the government, which are too many to individually spend time on. Highlights include foreign exchange market reforms, monetary policy or proxy, which are delivering results, energy reform, which has huge potential for Nigeria and importantly, the removal of fuel subsidy creating much needed fiscal space for investments in infrastructure. These reforms are causing a shift in business sentiment from the relative gloom of a few years ago to increasing optimism and perhaps as importantly, beginning to reflect in key economic indicators. And some of you may have seen that the inflation numbers released today show a further decline to 16% from a peak of about 34%. Real GDP growth is rising, which should boost overall consumer spending. Foreign exchange reserves are also increasing, which should provide long-term support for the currency. Inflation is moderating, as I mentioned, reducing the strain on consumer wallets. Finally comes Fit. UAC is a house of scalable quality brands and cheap bolsters this position. Importantly, it is in the food and beverage sector, an area we know very well. In the next section, we provide an overview of CHI, which over 45 years has grown to become a leading food and beverage company in Nigeria. The business that operations producing the Capri-Sun brand under license in the early '80s. In the late '90s, it launched its own juice brand, the much loved Chivita and in the mid-2000s, launched Hollandia, the value-added dairy brand. The success of the business led to its acquisition by the Coca-Cola Company via a 2-phase transaction between 2016 and 2019. CHI has grown to own a wonderful set of brands and an excellent set of products. It is a well-invested business and is the largest aseptic carton packaging manufacturing facility in Sub-Saharan Africa. It has very strong quality assurance processes, supply chain and process flexibility, which allows for the production of more than 50 SKUs. It also has efficient procurement systems to deliver value to the consumer. CHI benefits from truly outstanding nationwide distribution. The business is run by a highly capable and experienced team, which boosts the overall quality and strength of UAC's management. CHI's excellent brands and products are #1 or close #2 in each of its target segments. Importantly, it has more than 30% market share in each of these segments. The unique segments the business operates in are the juices, nectars and still drinks market or JNSD, where CHI is the close #2 player with 38% market share and the products are sold under the Chivita brand and the Capri-Sun brand under license. The business also plays in the evaporated milk space, where it is the #2 player with 33% market share. And under the value-added dairy segment, we also have a drinking yogurt offering, which we're the #1 player with 43% market share. The evaporated milk and yogurt products are sold under the Hollandia brand. Finally, CHI has 2 brands in the snack space, SuperBite and Beefie, where the business with these 2 combined brands is #2 with just over 30% market share. In the 2024 financial year, which is the most recent set of audited results, CHI recorded revenues of NGN 428 billion and EBITDA of NGN 54 billion. The business has approximately 1,600 employees, supported by 3,500 outsourced personnel. In the next section, we go over highlights from the transaction. Given the relative scale and importance to us, we ensured we obtained robust advice, covering legal, accounting, tax, human resources, IT, insurance, environmental, technical to support our diligence. We obtained advice on financing, optimal debt structures, legal advice from international council across 2 jurisdictions and domestic counsel on our bid documents and also putting in place the financing agreement for the bridge and the long-term takeout. We secured insurance for our warranty and indemnity package and obtained robust tax advice. And we are grateful to advisers for the hard work and dedication they put in and would like to specifically call out Standard Bank, Stanbic IBTC, Fasken and Templars who went above and beyond over the course of the transaction. Total consideration paid to the seller was NGN 182 billion. for which we acquired a business with no long-term debt, NGN 22 billion in cash and NGN 54 billion in EBITDA, as I've mentioned. The business has NGN 118 billion in working capital financing, but this is backed by NGN 151 billion in net working capital. We incurred just over NGN 9 billion in transaction expenses, some of which we are going to -- to be incurred as we complete our refinance. And we hedged our payment, which was denominated in dollars and given the naira's appreciation that has cost us NGN 7 billion. I will now hand over to Funke to take us through deal structure and financing.

Thank you, Fola. Good afternoon, ladies and gentlemen. I'll walk you through the deal structure and how we financed the acquisition of CHI Limited. First, I will explain the structure, then how the acquisition was funded and conclude with what we aim to achieve going forward. To execute the transaction efficiently on ring-fenced obligations, we set up a newly incorporated 100% owned special purpose vehicle called UAC Food & Beverage Company Limited, which served as the acquisition and financing company. The transaction involved the transfer of 100% of CHI shares to UAC for a cash consideration of NGN 182 billion paid to the sellers. To fund this, we used a mix of equity and debt. NGN 31 billion or 17% of this was funded from UAC's cash and NGN 152 billion or 83% was funded through debt. The debt was primarily executed through a U.S. dollar bridge facility, which ensured the sellers receive their proceeds in U.S. dollars and enabled timely completion of the acquisition. The bridge facility has a 12-month tenor and is priced at SOFR plus 5.5%. In parallel, we executed a foreign exchange risk management program, including a forward contract to hedge our exposure to currency volatility. Now prior to concluding the acquisition, we secured a fully underwritten refinancing package in naira, giving us certainty of long-term naira funding once the bridge facility matures. We expect to complete the refinancing of the dollar bridge facility over the next 3 months. Our objective is to transition into longer tenure naira debt, and we aim to do so using a mix of 2 sources. The first is a term loan from banks and the second is a proposed bond issuance. It's important to highlight that the term loan has been deliberately structured with a sculpted amortization profile with principal payments deferred, which will support integration and cash flow stability. And in preparation for the bond, UAC has registered a NGN 150 billion bond program with the Securities and Exchange Commission. The program provides us with flexibility and enables us to approach the capital markets for long-term funding when pricing conditions are supportive. And with interest rates now easing and trending lower, we expect to benefit from more favorable pricing at the time of issuance. To also support the bond issuance, UAC maintained an investment-grade credit profile with an A rating from DataPro and an A- rating from Agusto & Co. So to summarize, the acquisition was executed through a newly incorporated SPV. It was funded with a mix of equity and dollar debt. And now that the deal has closed, our focus is on transitioning into longer-term naira financing. I will now hand the call back to Fola to continue with the rest of the presentation.

Thank you, Funke. The acquisition of CHI has further bolstered our house of scalable quality brands. We've gained exposure to large attractive growth markets in which we have strong market positions. We view CHI as a well-run business and a few weeks or just about a month into our ownership, our belief has been affirmed. And we've identified a clear set of value creation drivers in areas that UAC has a successful track record. We see 2 major risks inherent with the transaction and both relate to the meaningful import component -- or imported component of CHI's raw materials. The first relates to exposure to foreign exchange volatility or fluctuations, and the need to source foreign exchange to fund operations. We have experience managing this and we'll focus on over the long run and gradually shifting to domestic -- to some domestic procurement and continuing to be very careful with treasury risk management and very disciplined with pricing. It's also important to note that we have no disadvantage relative to any other players in the market. We also note that reliance on imported raw materials leads companies to hold longer-term inventory than would have been required if the supply base was largely domestic. And in 2024, CHI closed with 221 days of inventory. We'll leverage our experience from our similar business mix paints that has very, very similar sourcing characteristics to CHI to optimize this. And by way of contrast, our Paints business had approximately 90 days of inventory in the third quarter of this year. So we see meaningful room to bring down the inventory holding days. Following the acquisition, our Packaged Food and Beverages and Paints business -- and Paints businesses will contribute 85% to revenues and 93% to operating profit. The acquisition of CHI meaningfully increases our scale while long-term debt increases from our net cash position prior to the acquisition. Our revenues increased more than threefold from NGN 220 billion approximately to over NGN 700 billion and our EBITDA from NGN 25 billion to just shy of NGN 70 billion. Our value creation focus will be largely around 2 things. The first being margin improvement, and this is an area in which we have a very good track record. Our business, UAC Foods, which is very similar to CHI is reflected on the top of the page. UAC Foods, as many of you know, like CHI plays in the snack segment, specifically long-life sausage rolls, where it is the #1 player and CHI is the #2 player, it also plays in the beverages space with our Swan water business and has an ice cream business that has meaningful dairy components. Since 2022, UAC Foods has grown at a compounded annual growth rate of 63% and in parallel, increased its operating margins from 1% to 15%. CHI has similarly demonstrated very strong growth from a larger base growing from NGN 171 billion business in -- revenue business to more than NGN 500 billion. Margins have, however, suffered and addressing this margin disparity is our #1 value creation focus. Next, we'll be reducing long-term debt, which is currently at 2.4x EBITDA post acquisition. We would aim to bring this down to around 1.5x. It's important to note that in sizing the debt, we didn't start from a target leverage number, but rather work with our advisers to work out what the optimal debt leverage -- the company's debt capacity and the number was fixed. It was a fixed naira number and which translates to 2.4x EBITDA, but we have historically operated with net cash and would seek to be a bit more prudent and bring this down to around 1.5x. We would also closely monitor working capital debt, and we weigh this against working capital balances and make sure that we have meaningful cover in terms of net working capital balances relative to working capital debt. And you see that on the lower half of this page, we're in a good position here. I should stress that as we optimize overall levels of working capital, we will see this position begin to reduce as well. The next big element we would focus on is on deleveraging, and this is going to benefit from our free cash flow generation, which would be driven by margin improvement and working capital optimization. And we will also shift our focus to divesting non-core assets. It's an area in which we've had recent success. I think we've generated over $30 million in divestment of noncore assets over the last few years, and it's an area that we're going to apply a lot more focus to going forward following this acquisition. The group generated NGN 67 billion of EBITDA before accounting for potential margin improvements, and this is well in excess of our debt service cost of NGN 56 billion. As Funke mentioned, we are fortunate to be in a declining interest rate environment, which we will benefit from by way of lower financing costs. The acquisition of CHI fits firmly with our growth strategy. And following the acquisition, we will focus on executing our value creation plan, remain ambitious and focused on delivering stakeholder value and see continued opportunities for growth in our businesses. Thank you, and we'll now take questions.

[Operator Instructions] Your first question is from Olu Aksomi.

My name is Olu Aksomi from United Capital. Just to ask, since UAC is listed on the exchange as a different entity, is CHI also expects us to be introduced as a separate entity? Or is it going -- or is the share be added to UACN article.

Thank you, Atomi. No, CHI is not going to be listed. It's a 100% owned subsidiary -- privately-owned subsidiary of UAC. So it would be consolidated in UAC numbers fully, but it's not going to be listed separately.

Your next question is from [indiscernible]

My name is [indiscernible] WSTC Financial Services Limited. My question would be around debt-to-EBITDA that was mentioned earlier. Is the goal to maintain 1.5x EBITDA as debt or what's the plan to [Audio Gap] what does UACN -- how long does the UACN look at winding down to the optimal working capital position, anything.

Thank you, [indiscernible] I think it's important to note that and I mentioned this during the course of the discussion, we didn't just -- we didn't choose sort of the 2.4x that we are today. We worked very closely with the banks to work out the combined group's debt capacity and size the debt appropriately. We just feel for prudence and to make sure we have headroom. We want to bring that down to around 1.5x. So I'm not sure that I would say that there's -- the 1.5x is some scientific optimal level. And that's what we will aim to be in the near term, much longer term. It's a very cash-generative group and business. So I expect that those numbers would come down. But I don't know what would -- I don't know the degree to which will come down below our short term 1.5 level as the business generates cash.

Your next question is from Samson.

Thank you for the detailed presentation. I have three questions. The first is around the margin improvement in the CHI business. Given the time you've taken in looking at the business and analyzing the business. Like in your opinion, what are the sources of this margin improvement? Are you looking at SKU rationalization, the naked margins of each of those SKUs? Can you give us a sense of where you think normalized margin for this business will be and how quickly we can get there? That's my first question. The second question is around financing option. You had mentioned term loan and bond. What are the prospects of equity financing to complement that? I note the current market price doesn't reflect the value of the acquisition just yet. But at some point, given the balance sheet leverage is now on the higher end of what you would typically find in markets of this nature. Is there some conversation that is being had internally or something that you would tend to change? And then my final question is on the asset disposal. The assets that have been identified, it looks like the green business in terms of mix of assets that you now have appear to be an anomaly in terms of the contributory margin as well as the working capital needs of that business, what does the disposal of assets like that look like? And are those conversations that you guys are considering. Those are my questions.

Thank you, Samson. I think your first question was around margin improvement, normalized target levels, approach and timing. I think we feel from a sort of target levels, minimum 15%. We have a close to identical smaller business that are priced at 15%. And so we see no reason why as a starting point, this business should not be there. So that's the first and easier one. Timing, we are working very aggressively on this, and we are going to set ourselves a goal of at least closing the fourth quarter of next year at these levels. Whether the full year will be at these levels, I don't know. But by the fourth quarter of next year, we want to be hitting these levels, but we're working on it at a rapid pace. It's by far the biggest priority for the team today. In terms of the sourcing, what we found is there are always multiple sources. And the naked margins are obviously a big lever. And you're right, it's the area that we start to focus on a lot. And when you dive into SKU by SKU reviews, we generally find opportunities to improve our margins, and we found some here and already implementing. But clearly, we'll also look to find some efficiencies below the sort of raw packaging material line to improve our naked margin. Term loan bond, you're right, it's going to be our focus equity, we have no plans to raise given that we believe that the business would easily sustain these levels of debt and pay them down, and you may recall that one of the questions we took historically was why keep so much cash on your balance sheet. So we don't want to find ourselves right back where we were, let's call it, 12, 18 months from now. So we feel we can easily manage this level of debt. A lot of work went into deciding on what level of debt we should use for this acquisition. And we feel that the company's cash generation would pay this down over time. We -- in terms of asset disposals, yes, we have identified assets to dispose given various sensitivities and discussions. Unfortunately, cannot sort of go into great detail on those now. But I will say, for example, that we have quite large minority positions in companies that are not core to us. Over time, we will look to realize value and the few other discussions that are going on in the group. But it's going to be an area where we devote a meaningful amount of management time and attention to realizing value from at optimal value for our stakeholders. There's going to be no rush to do so. We're going to try and do so in the amount that realize the value of our stakeholders.

Your next question is from [indiscernible]

My name is [indiscernible] Standard Chartered Bank. Once again, congratulations on this milestone acquisition. I have 2 questions. One, yes, I heard about the SPV that was used to do the acquisition. I'd just like to clarify the acquisition that where exactly is it going to sit? Is it on the SPV vehicle or on CHI Limited, the streaming of cash flows for servicing the debt, perhaps can you shed a bit more light on that. And then my second question is on FX risk, which you rightly pointed out. I mean, based on the existing entities in the group, you have your FX policy as it were. Now with CHI coming into the picture with a dramatically different FX content. Maybe you want to shed a bit more light into how -- are you going to retain your existing FX policy? Or is it going to be something a bit different for CHI Limited?

We use an acquisition SPV, but the idea is to have debt sit as close to the operating cash flow as possible. So we would explore moving that down to sit on the balance sheet of the business. CHI is bigger but very similar to our Paints business. They have almost identical FX sourcing needs in terms of proportion of imported to domestic. And what we just -- what we try to do with those businesses is avoid open positions. So we avoid having mismatches and would adopt the same approach that we've used very well with CAP in managing this business.

[Operator Instructions] Your next question is from [indiscernible] who asks, will you be considering an equity raise? And what are the time lines to dispose noncore assets?

No, we're not considering an equity raise. We have cash flows in excess of our debt service. We have very clear avenues to bring down what we think is an okay level of debt to a prudent or I guess, a low level of debt. And we don't want to find ourselves sitting down with excess cash on our balance sheet unless there's a tangible opportunity for us to deploy that cash. The time line for assets is what I can say is it's going to be a management focus. So we're going to -- we're focused on it immediately. The timing depends on factors that are beyond our control, but we're going to seek to balance a focus to realize assets with maximizing value or at least obtaining fair value for our shareholders. And I think I should add that realizing value from noncore assets, deleveraging is a tangential benefit. The primary driver for this decision is actually to free up management time to focus on businesses that are bringing in the bulk of our revenues. I think it's a very, very, very important point to stress that this -- the primary driver is morphing of our time from having to provide governance, oversight, craft strategies, recruit management and for businesses that are increasingly tangential and deploy those efforts and time to the businesses that are bringing the bulk of the value to the group.

Your next question is from Mike from Research Alpha. You're right. Congratulations on your -- on the acquisition. Would there be any effects on the deal on UACN from the new tax reform bill or the change in capital gain tax. He also asks if you're looking for additional acquisitions.

Thank you. Specifically as regards capital gains tax, there's nothing obvious I can see that affects us, but anyone who's read the new tax act that it has extensive provisions around manufacturing companies, which -- many of which benefit us, which we're studying and by virtue of being a manufacturing company itself, CHI would also benefit, but I cannot think of anything specific around capital gains tax that affects this business from the new tax act. Are. We looking for additional acquisitions? It's not a priority for us, but we remain ambitious. We are clear on our focus areas. We're clear on what we find interest in. We've just made what is at least for us, a very large acquisition. And so our laser focus is going to be on delivering our value creation thesis from this acquisition. And as I clarified, by far, the bigger driver of exiting noncore things is to free up the time to deliver on this value creation strategy for our core businesses.

Your next question is from Samson.

It's [indiscernible] Investment Management again. Can you talk to capital release on the working capital side? I saw in your slide, CHI currently has a very high level of inventory of 2 to 9 days as opposed to your Paints business that has about 90 days and you say both businesses are kind of similar in terms of characteristics. And also perhaps talk to what the working capital relationship in your existing food business is and what normalized working capital for this business is? And what is the sort of expected size of capital release that we can expect to see once you are able to normalize the working capital cycle in this business?

Yes. So we have started having those discussions internally because we now own the business and we are firmly in management. One thing that we try to avoid is the what I'm not looking for is -- we believe in evolution of revolution. So we've seen that the working capital levels are, we think, higher than is optimal, but we would never attempt to bring them to perfection with one full swoop because then you can cause meaningful disruptions. So the cash conversion cycle for the business, which is what is more relevant in this context, I believe it's currently now about maybe 140, 150 days. We will look in the near term to bring that to between 100 and 120 days and then eventually bring that down much lower. And it's a NGN 500 billion business. So I'm trying to think if -- I'm trying to do the rough math. Every 30 days, let's call that 10% would be about NGN 40 billion, if my math doesn't fail me in terms of cash generation.

The next question is from [indiscernible]

Thank you very much for this update call. So I have 3 questions. So the first, I know you touched on it a little bit, but is it possible just to expand a little more on what has driven the margin decline over the last 4 years? And just related to that, is there something -- like what specifically UACN will be doing over the next 1 year to get that margin back up to 15%. It seems like a fairly short period to get back to the 15% that CHI had reported back in 2022, I believe, from your disclosed financials. My second question is on CHI's current capacity utilization. And based on what you've seen, do you think there'll be a need to invest in the capacity? And if so, have you incorporated that into your existing financing arrangements? And then my last question is on the potential impact of MDS and CHI's maybe in-sourcing and outsourcing logistics arrangements. Is there any impact that, that would have on CHI given the scale of its business, i.e., positive or negative? And if so, what do you think that impact would be?

Okay. For the margin, I can only give my hypothesis for why the margins declined over the last few years. What we believe and what we've seen with other companies is where there is rapid inflation like occurred in Nigeria, and I would argue unusually, the kind of spike in inflation that we saw in the last few years where it picked 34% is unusual. It takes a laser focus on pricing to avoid and management practices that incorporate rigorous review of pricing at an SKU level to avoid margin declines. And I'm not sure what the circumstances were. I don't know why that wasn't the case here. But we saw -- we've seen it broadly in FMCG in Nigeria. Some companies were able to laser focus and increase price and others were not. And you saw that margin decline. We've been here now for about 6 weeks, and there's nothing I've seen that makes me -- that reduces my confidence about the ability to certainly improve margins. All I can say is the target we set for ourselves 4 quarters to get to 15% by the fourth quarter. I believe we will get there. If we fall short, it's not going to be 8% or 9%, maybe we get to 12% or 13% or maybe we exceed. But it's just a laser focus on pricing or a failure to take a laser focus on pricing in what was a highly inflationary environment. I would say is the biggest driver. And then there will be 1% or 2% that we can squeeze out from an efficiency perspective. In terms of CapEx, we -- like I said, in terms of deciding the company's debt capacity, we took advice and there was a very, very detailed debt capacity model built, including CapEx. The business doesn't need meaningful capacity. It's very, very well invested. But you think about replacement CapEx, you think about innovation, you think about replacing distribution tools, all that is built in, but there's no real need. We have to be extremely successful for there to be a need for massive CapEx investment. It will be a real upside case for us to get there. And in terms of MDS, the way we run -- the way MDS operates with our existing companies and we operate with CHI on a totally arm's length basis, it will pitch it services. If the team at CHI sees value, they may work together. If they do not see value, they don't work together. So there's no going in expectation that MDS and CHI are going to work together on logistics services. I hope they can find a way to do so, but it's not -- it's in nowhere part of any of our plans, and it's not mandated.

Okay. Just a follow-up question, specifically on the pricing evolution. I mean, looking at UAC and Food and Beverages, I mean, you've managed to actually increase your margin significantly over the last 2 years just on the pricing side. Is it possible to comment on what some of the other maybe CHI competitors have done specifically on pricing over the same period?

So we've seen, CHI, I guess, has multiple competitors. Unfortunately, most are private. So in juice, it was competing against, I guess, its sister company, which is Coca-Cola. I don't know what they did with pricing, if I'm honest. Against us, in the space we know best, we saw some players take pricing, and they did. They've done well. We've done very, very well in our joint snack space. And I would also say that we've seen CHI belatedly take pricing in that space and do very well. And in the milk segment, evaporated milk FrieslandCampina is the biggest competitor there. They initially were slow to take pricing, but I think they've released their results for the first 2 quarters of this year, and they've recorded meaningful increases in margin. So I think most people eventually will get there. It's the speed and anticipation that varies by player.

Okay. And then just one last question for me. Is it possible to also give us just a brief comment on volume changes over the period that you've reviewed on your slides as well?

So what the business has done very well is grow volumes. That's what it's done very well. So volumes have increased. And we think that maybe -- there may have been an overweighting of continuing to push volume increases versus balancing volume increases with margin like we have done, but it's grown its volumes meaningfully over this time period.

[Operator Instructions] You have a question in the chat box from Brad from Equinox Partners. He asks, is the bridge loan currently hedged in Naira? Or is there U.S. exposure there?

Funke, do you want to tackle that or I?

Thanks, Brad, for the question. The bridge loan is a U.S. dollar facility, and we've entered a forward contract on that to protect against any volatility in the currency. So it's a dollar bridge facility.

Yes. But Funke, it's fully hedged. I think that's the question.

100% hedged, yes.

Your next question is from Desmond from WSTC. He wants to know if the brand name will still be CHI Limited or it will be changed.

Firstly, Desmond, none of the company's brands is CHI. The company has 3 brands, Chivita, Hollandia, SuperBite and Beefie, and there's no intention to change any of those brands. The corporate name is CHI Limited, also no intention to change the corporate name. But just to be clear that none of the brands is CHI. They're all different brands.

[Operator Instructions] You have a question from Samson from [indiscernible] who wants some clarification on debt service costs. What assumptions goes into this full refinancing into naira and what is the expected interest rates?

Yes, full refinancing into naira. I think the expected interest rates are somewhere between 18% and 19% on a blended basis.

[Operator Instructions] Your next question is from [indiscernible]

So just operationally, I know you said the UACN Group is very well prepared given your existing tech systems and I guess, your executive team. Are there any significant sort of management or staff changes that you plan to make over the next, let's say, 12 to 18 months?

No. So there are changes that were -- that occurred on account of the deal, the certain executive CEO and CFO were employees of the Coca-Cola Company. And by virtue of the deal closing, that was seconded to CHI have returned to their parent. But aside from that, we don't have any planned people changes over the course of running the company, that may change, but we have no planned people changes over the next 12 to 18 months.

And does that mean that you'll be -- sorry, so you might have mentioned this earlier, but -- so will CHI be functioning from a staff perspective as its own separate silo? Or are you going to integrate it with part of the FNB team as well?

CHI is going to operate for the time being as a stand-alone company. There are arguments for and against to combine it with the other F&B company, but there have been no decisions taken on that as of this moment.

Next question is from [indiscernible]

My question is around net asset for UAC and UAC of Nigeria as a group. In the short term, quarter-on-quarter, it declined. Was this decline due to this acquisition? Or are we looking -- what are we looking at going forward for -- in terms of net asset position in the immediate short-term?

Are you referring to our Q3 numbers?

Yes.

Okay. If it was Q3, there have been a marginal decline, if memory doesn't fail me.

Yes, it's marginal.

So that's -- yes. If it's -- if that's what you're referring to, yes, it's transaction related. And going forward, we expect our net assets to grow as our profitability grows is our expectation going forward.

There's a comment in the chat box from Shruti who writes, thank you for the detailed call. Congratulations on what is clearly a transformational deal for UAC. What's been the biggest positive surprise about CHI since you took over ownership?

Thank you, Shruti. There have been a few, but I would try and stick to the biggest one. I think the biggest one has been the quality of the team. Clearly, when we bought the company in a process and although we met certain members of senior management, these things are generally chaperoned experiences. But over the course of the first few weeks of our ownership, I spent a lot of time with, I would say, the top 50 people across the company and across functions. And at the end of that sort of phase, I actually called the Chief People Officer to tell I thought you've done a fantastic job just given the depth and quality of the team that we -- that I met. So I'll say that's the single biggest pleasant surprise. Close seconds would be, again, in due diligence, you spend a lot of time with the physical asset, but actually owning the asset and getting to sort of look in every nook and cranny, it's an impressive physical asset. And third will be just experiencing the power of the products and the brands in trade when we begin to sort of spend time with trade as owners of the business versus being again chaperoned. But if I had to choose one, by far, the most impressive surprise so far has been the quality of people.

Your next question is from John.

Thank you for this very detailed presentation and congratulations on the acquisition. Yes. So my question is just like 2 simple questions. The first is on the benefit CHI previously enjoy with related party. So prior to the acquisition, I believe they enjoy both manpower services and also discounting of some of the supplies from the supplier. So now that it's been shifted from Coca-Cola to UAC, how do we see this pan out in terms of the working capital cycle that you mentioned that should show a reduction? Because I believe that this should increase maybe trade payables because of the benefit. So I don't know if the benefits will now be replaced or if it's going to remain the same way. So my second question is on exports, right? Do we envisage an increase in exports in line with the overall plan or strategy for the group as regard to CHI Limited?

So on the first question, let's just call that sort of risk or downside from carving out of the Coca-Cola system. And I'll admit that it was a very big point for us in our due diligence, trying to quantify and estimate this. What we found to our surprise is that CHI was run totally as a stand-alone business, which then begins to make sense because if you think about Coca-Cola across Africa from what I know they have 350 employees across the Coca-Cola sort of system, ignore the bottlers, the bottlers are stand-alone entities run independently. And this business alone had 1,600 direct and 3,500 indirect. Coke runs on SAP, this business was run on Microsoft Navision. Coke is largely a CSD business. This business makes milk and yogurt. So we found that our work planning to prepare detailed plans to carve this thing out of Coke were not necessary. And I do have to extend thanks to Eelco Weber, who was the CEO of the company immediately prior to the acquisition in, I guess, preparing for a fantastic transition. He and I planned, I think, 2 months of handover, but we spoke a couple of weeks ago and realized we haven't spoken in 3 weeks because it just happened so seamlessly. So I think a combination of the business being stand-alone on account of the differences to the rest of the Coke system and the preparation for the transition. No, we have no concerns about disadvantages operating as a stand-alone business. And I would say that 6 weeks in, if anything, maybe we'll have some benefits just from much, much, much faster decision-making for the company. In terms of exports, we believe and are increasingly validating that there's a big opportunity. So it's there on the value creation list. But we sort of like facing things one at a time. Now there are very few things that would create more value than moving the margins of this business from 6% to 15%. So we are laser focused, and we are gearing the organization towards delivering that. And I should say, by way of pleasant surprises, I have been surprised by how well that message has been received by the team here. Export is an opportunity. It's on the value creation list. And I would estimate we can get at least 10% more volumes from export, which we will do. But it is not -- it doesn't come close to the work on margins in terms of ranking from a priority perspective.

There are some questions in the chat box. The first is from [indiscernible] who asks if there will be a dividend policy going forward? The second is from Samson, and he wants to get a view on CHI's route to market performance. Do you feel the current distribution setup is delivering sufficient reach and shelf presence? Or are there plans to adjust the model to deepen coverage and execution in key regions?

I think our dividend policy remains the same. We generate cash. We estimate our investment needs, and we aim to return capital in excess of those needs to our shareholders. Obviously, this acquisition has transformed the scale of the business. We've gone from being a NGN 200 billion business to being an over NGN 700 billion business, NGN 25 billion in EBITDA to NGN 70 billion in EBITDA before delivering any margin improvements. So from a sort of absolute basis, the expectation is that the dividend payments should go up just to address on [indiscernible] question. On Samson's question, I think the company has fantastic route to market and distribution capabilities. It's not a thing you ever stop trying to improve. But in the short time we've been here so far, I would say the opportunities we've seen are balancing out the company's distribution strengths. So we've seen that we are extremely strong in one set of products in, say, the East. Can we match that strength across the portfolio versus trying to get into new areas. I think the go-to-market capabilities and distribution are already top notch.

Desmond from WSTC asks how soon do you plan to localize the purchase of inputs? [indiscernible] from VCL also writes, congratulations on the CHI acquisition. How does the business plan to manage its integration process with an outlook on raw material sourcing? The second question is, what's the strategic outlook towards shareholder returns? And thirdly, should we anticipate a year-on-year reduction or increment in the share -- in the scheme share purchases?

On the first -- those are many questions. I'm just trying to move them all down. In terms of localizing raw material sourcing, it's going to be a journey, and we think about this in terms of they are all sorts of the caps, cartons, shrink wraps, milk, sugar. So it's going to be a journey, and I don't think there are going to be massive shifts in the short term. I think it's going to be incremental shifts over time. And we plan to do this via, I would say, I was going to say 3 approaches, but there may be more. One is working with the quality and procurement teams to validate and onboard vendors that can supply things that we currently import today. And that work in fairness already started by the team. The second would be supporting players locally who are not yet at the scale or sophistication to suppliers to develop their businesses such that over time, they begin to provide us inputs. And the third is just for the existing things that we have people who can do it, just giving them balancing our importation and the existing domestic procurement. So it's work that is ongoing, but I think we're going to see slow shifts versus any massive swings in that regard. Integration, I think just our philosophy to running our businesses is we had a checklist, and I would say we're done with our checklist. The only big thing that I would say is left to do is around an ERP transition, but it's more moving this company from Microsoft Dynamics to our SAP S/4HANA, but we've taken ownership of the business and it runs, and I'm very thankful to the management team for making that process easy. And we don't do group-wide procurement. So the company's procurement continues to run exactly as it has run with the tweaks I've mentioned around trying over time to improve local sourcing. Outlook towards shareholder returns, we anchor everything, we do on return on invested capital. That has not changed. And our view is that if the day-to-day activities that we embark on generate high intrinsic returns on invested capital as a business, we will generate high returns of capital to our shareholders and where the actual cash returns exceed our investment needs, return same to our shareholders. The group scheme shares, yes, I think there's a quantum of shares, I don't have the exact numbers that is a maximum possible pot for the group scheme shares once those are purchased, there will be -- there's no need to buy any more shares.

The next question is from Charles from CE Enterprises. Who asks, please, is there a plan for an interim and improved dividend following the acquisition?

There's no plan for an interim dividend. It's not part of our current dividend practice. Will that change in the future? I don't know, but we do not have any plans to institute an interim dividend. Are there plans for improved dividend? I think I've outlined our dividend policy and by sort of extension, much bigger profit, same size of business, the nominal dividend should go up.

Your next question is from [indiscernible] from Access ARM Pension. Considering the FX exposure from imported packaging materials, could you share the expected time line for ramping up local production? Also in the context of your planned debt refinancing, what level of U.S. dollar bridge loans do you expect to retain?

So I should stress that 100% of our production is domestic. We don't import and sell anything. What we do is we import some raw materials, convert them and sell. And I've said, over time, we should see the portion of raw materials that are imported domestically increase. On our earnings calls, I have said in the past that the notion of import risk is really truly relevant as regards foreign exchange sourcing. So in the periods when dollars are scarce because what we found is whether you buy -- I mean, if you take UAC Foods, which is a very similar business that has very high degrees of domestic sourcing, buying flour, sugar, oil or grand cereals, which has maybe 80%, 90% domestic sourcing, the prices of all of these things move with the FX. So the discipline and skill to manage the inflation is relevant. The difference here is having the treasury sophistication to make sure we purchase FX at the right rates, which we do. In terms of refinancing, we're refinancing the entire bridge loan, which is hedged. So we're not taking naked dollar exposure. In fact, I would say we've lost some money because the naira has appreciated, and we refinanced all of that into naira either in -- either this year or early in the first quarter of next year. So we plan to retain 0, I guess, directly answer your question.

See, we note your comments on the presentation request. The slides are currently on our website, and we'll be dropping the link in the chat box shortly. Victor would also be providing the recording of the call afterwards on our website. [Operator Instructions] There's a question from Samson who wants to get a bit more color on CHI's margin enhancement plan. How are you thinking about price increases for 2026 across the different product lines? And separately, what's the trajectory on volumes, both historically and how you see that shaping up next year, especially with the pricing of value.

One thing that I should touch on that we haven't done, and this is just luck. It's nothing to do with the brilliance of our planning. What we are finding in FMCG in Nigeria is that the prices of goods are actually coming down. So we've had one surprise. We've seen only 1 -- I guess, 1 month of post-acquisition results. And because prices are coming down without doing anything very intelligent, we have already benefited from seeing margins going up. So I think it's -- I wouldn't necessarily start by saying that the plan is to ramp up prices across the board. That's one. Second, with these kinds of businesses, there's just so many things that go into trying to manage margin, of which pricing is only one of a set of tools, but we don't necessarily go off and don't like margin, jack up price. There's mix, there's efficiencies in manufacturing, there's formulation. So there are many things that go into try to get your optimal margin. And our philosophy is that increasing price is the last thing you do. So I wouldn't necessarily jump to the conclusion that we're simply going to jack up prices to improve margin. In fact, I would say, unlikely given the work we've done. Historical margin trajectory, I think this company grew volumes on a compounded rate of just shy of 10% over the last sort of 4, 5 years. Going forward, we feel that we are going into a much stronger consumer environment than we had historically. So that should support good volume growth as the consumer has more spending power.

[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 and the questions. And I wish you a wonderful rest of the day.

That concludes the UAC of Nigeria PLC Analyst and Investor Conference Call. Thank you for your participation. You may now hang up.