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

Good morning and good afternoon, ladies and gentlemen. Welcome to UAC of Nigeria PLC Half 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 Q&A session. I will now hand the call over to Fola Aiyesimoju. Please go ahead.

Thank you, Cynthia. Good day, all. Funke and I will cover today the operating environment in the first half of the year. We'll touch on our strategic priorities, discuss financial performance and present our outlook for the business. We will reference the numbers in the top right of the presentation so that you can follow along. Please turn to Slide 5. We delivered good performance in the first half of the year. Compared with H1 2025, revenues increased 231% to NGN 365 billion. Operating profit increased 289% to NGN 49 billion and profit before tax increased about threefold to NGN 34 billion. The numbers reflect our increased scale compared to a few years ago and are on account of a combination of the continued growth in our Food & Beverage and Paints businesses as well as the acquisition of CHI, which we completed in the fourth quarter of last year. The CHI acquisition was funded by a mix of debt and equity, and we recorded strong growth in profitability after taking into consideration finance costs. Following the acquisition, we have continued to focus on the narrow set of initiatives that form the core of our approach to running our businesses. We continue to invest in technology. We are careful about capital allocation decisions. And by far most importantly, we continue to focus on talent. Please turn to Slide 7. Operating conditions were mixed in the first half of the year. We enjoyed tailwinds in the first quarter with accelerating growth, declining inflation, currency appreciation and moderation in borrowing costs. Conditions were less benign in the second quarter, largely on account of the conflict in the Middle East. Energy costs increased, impacting production and distribution expenses as well as selling expenses. Supply chain planning was more complicated with the closure of the Strait of Hormuz leading to delivery delays and extended lead times for imported raw materials. Slide 8 and 9 reflect costs for key inputs in our production process. We enjoyed prices lower than levels recorded last year, partly on account of the appreciation of the naira. A notable exception worth highlighting is the sharp increase in the cost of petrol, which had a direct negative impact on consumer disposable income. Please turn to Slide 11. Our performance was on account of and driven by a house of scalable quality brands that many of you are familiar with. As discussed on the call to announce the acquisition of CHI and on our full year 2025 results call, we added the Chivita, Hollandia, SuperBite and Beefie brands to our house of brands. Please turn to Slide 12. On the call to provide an update on the strategic rationale for acquiring CHI, we shared our view that CHI is a commercial powerhouse with attractive market positions in large growing markets. We, however, felt there was considerable scope to improve margins. The right of this slide contrasts the historical margin trajectory of our Food & Beverage business, UAC Foods with CHI. You will note that while UAC Foods has enjoyed meaningful margin expansion, CHI's margins declined. Working with the team at CHI, we made considerable progress addressing the margin disparity in the first half of the year. The work is far from complete, and we expect bumps along the way. Given that we acquired the business for an extremely long-term horizon and are ahead of track, we're encouraged by the overall trajectory. Please turn to Slide 13. Our businesses were cash generative in the first half of the year on account of margin improvements and working capital expansion. In making capital allocation decisions, we consider investing for growth, reducing leverage and returning capital to shareholders. In the first half of the year, we focused on both investing for growth and reducing leverage. The combination of our improved margins, growth and cash generation resulted in long-term net debt to EBITDA of 1.6x. Please turn to Slide 14. If we attempt to distill our approach to this essence, it will be to concentrate talent and capital on high potential opportunities. In this slide, a number of our key executives assume new responsibilities. Bolarin Okunowo, who previously run CAP PLC and delivered outstanding results, was appointed Executive Director of Corporate Services & Transformation at CHI. Oluyemi Oloyede, who run UAC Foods Limited and delivered exceptional performance is now Executive Director of Operations at CHI. Yemi and Bolarin is on CHI's Board of Directors and have made considerable impact over a relatively short length of time. Aramide Nwokediuko, who was General Counsel, Company Secretary at CAP PLC, has been appointed to a similar role at CHI with added responsibility for public affairs and communication. Stephen Adekogbe, until recently General Manager Manufacturing at UAC Foods has been appointed Manufacturing Director at CHI. And our focus on talent over the years meant we were able to largely rely on internal promotions to fill vacated roles. Lekan Aluko was appointed Managing Director at CAP, where he previously was responsible for supply chain. Jethro Iruobe was appointed an Executive Director at CAP, responsible for Corporate Services and Exports; and Tola Bella was appointed General Counsel and Company Secretary at CAP. At UAC Foods, Temitope Omodele immediately past Chief Finance Officer, was appointed Managing Director; and Rafiu Abatan, who was responsible for engineering, has been appointed General Manager Manufacturing. As a consequence of these executive moves, there are several promotions down the line, providing opportunities for growth some of our talented colleagues. We wish those in new roles great success and are excited for their impact on the business. Funke Ijaiya-Oladipo is on the call with me today, our Group Finance Director; and Ayomipo Wey, our Group General Counsel, have hatted at CHI since October last year and have now returned to the holding company. We continue to grow our UAC Academy with a focus on developing the next scale of leaders. We continue to work on designing and implementing incentive schemes covering short-term and long-term performance to deliver shared prosperity to those who contribute to value creation. At CAP, we grew our retail footprint, adding 42 new touch points in the first half of the year. We also had a very successful launch of Dulux Spruce, a brand aimed at cementing our position in the mid-tier segment to complement our existing strength in premium and ultra-premium segments. On technology, the big project over the next 18 months is the implementation of SAP S/4HANA for which preparations are well underway. We're also taking some of the technology tools from across the group and deploying them at CHI as well as taking learnings from CHI to deploy in other parts of the group. Very briefly on Slide 15, we show pictures of new product launches over the half year, and I've touched on some of these already. I will now hand over to Funke to walk us through the financial performance in detail.

Good day, everyone. Please turn to Page 17, which provides an overview of the group's financial performance, comparing our results for the first half of 2026 with the same period in 2025. UAC Group's revenue, operating profit and profit before tax all more than tripled compared to the same period last year. This reflects the consolidation of CHI Limited, which we acquired in the fourth quarter of 2025 and which now contributes for a full half year for the first time and is the main driver of the year-on-year growth. Our group consolidated revenue was NGN 365 billion for the half year. Operating profit was NGN 49 billion. Profit before tax was NGN 34 billion. Earnings per share was NGN 6.58 compared to NGN 2.38 in the prior year. We generated free cash flow of NGN 71 billion, more than 8x the NGN 8.8 billion generated in the first half of 2025. And this reflects the higher operating profit due to the contribution from CHI Limited as well as a deliberate release of working capital, in particular, an NGN 30 billion reduction in inventory as we work towards optimizing inventory levels across the enlarged group. Lastly, on this slide, our return on invested capital for the period was 25% compared to 40% a year ago, reflecting a much larger capital base following the CHI acquisition. As we grow earnings on that base, we expect return on capital to recover in line with our value creation plan. Please turn to Page 18, which shows revenue contribution per segment. The bulk of the growth in our top line came from the Packaged Food & Beverages segment, which contributed NGN 268 billion on account of the consolidation of CHI Limited as well as growth in our other company in that segment, UAC Foods Limited, which recorded volume growth across all categories, so spring water, snacks, ice cream and Zuri Seasoning. The Paints segment contributed NGN 2 billion with the top line growth in that segment up 12% year-on-year, driven by volume growth across our range of Dulux categories, supported by an expanding retail footprint. These increases more than offset the NGN 15 billion revenue decline in our Edibles & Feed segment, which reflects lower finished goods prices and lower sales volume relative to the prior year, while our Quick Service Restaurants business was broadly flat. Please turn to Page 19, which shows a summary of the group's income statement. I've covered revenue, so I will start with gross profit, which more than tripled to NGN 105 billion, and our gross profit margin expanded 306 basis points to 28.6%. This reflects our sales mix, the greater contribution for the higher-margin Packaged Food & Beverages segment as well as moderating input costs during the period. Operating expenses were NGN 57 billion, higher in absolute terms on account of our enlarged group. However, our operating expenses to sales ratio was broadly stable, increasing only 24 basis points to 15.7% as higher distribution and logistics costs were largely offset by our continued focus on cost and expenses discipline. Other income was NGN 1.5 billion, broadly in line with the prior year. As mentioned earlier, we recorded an operating profit of NGN 49 billion, 289% higher and our operating profit margin expanded 201 basis points to 13.4%. Below the operating profit, our net finance costs were just under NGN 16 billion for the period compared to NGN 3.6 billion last year, and this reflects interest on the borrowings from the consolidation of CHI Limited. The share of profit from associate companies was NGN 1.3 billion, slightly lower than last year as the prior year included a gain from the sale of noncore property assets at MDS Logistics that did not recur in 2026. Our profit before tax was NGN 34 billion, 210% higher than the prior period, and our profit before tax margin was 9.4%, 62 basis points lower than the prior period as the higher finance costs more than offset the margin expansion we achieved at the operating level. Please turn to Page 20, which shows an overview of the group's financial position as at 30 June. We have roughly NGN 76 billion in net assets. Our net debt reduced from -- reduced to NGN 257 billion from NGN 294 billion at the year-end, which is a reduction of about NGN 37 billion. Following this, the group's long-term debt to the last 12 months EBITDA ratio improved to 1.6x, and this deleveraging is a central priority and part of our value creation plan. Capital expenditure was NGN 3.6 billion and this is roughly 1% of our revenue and focused largely on the repair and maintenance of existing assets. The group's cash cycle improved by 5 days to 106 days, reflecting our focus on optimizing working capital, particularly lower inventory days. Please turn to Page 21, which shows an overview of the group's net debt profile. The key takeaways are that half of the group's debt is short term. This is working capital financing, while the balance is long-term debt, largely attributable to the addition of CHI Limited. The holding company carries total debt of about NGN 99 billion, roughly 1/3 of group debt, and this reflects our group treasury structure, where you will see the holding company raises debt centrally and on-lends to subsidiary companies. And this is part of our strategy to optimize finance costs as it gives us the flexibility to access a broader range of funding sources. This is the end of the financial highlights. So I'll now hand over to Fola to take us through the next section of the presentation. Thank you.

Thank you, Funke. Please turn to Slide 23. Over the course of the first half of the year, our efforts were largely focused on integrating CHI under UAC's leadership and working with the team at CHI to improve margins, and we've made considerable progress here. As part of these efforts, as mentioned, several key executives have seen new roles in the group, and we wish them great success in their new roles. Our focus going forward will continue to be on process technology and disciplined capital allocation, and we hope that this will drive continued margin improvement and cash generation. A mammoth project we have before us and that will absorb a considerable amount of management bandwidth will be the implementation of a new ERP system, SAP S/4HANA CHI, however as a project we successfully executed in the recent past across all other entities in the UAC Group. Finally and most importantly, we will focus on rebuilding our talent depth to drive the next phase of our growth and expansion. And thank you for your attention, and we'll now take questions.

[Operator Instructions] your first question is from Williams.

I have 3 questions. One is on margin, and you had talked about how you have improved margin significantly, especially with the CHI business. I would just like to unpack that a bit in terms of what specific actions and what portion of that is probably due to lower input cost and what are the actions we're taking to drive that margin optimization? The second question is on Zuri Seasoning. And just want to understand what your strategy is for that seasoning segment in terms of competition, in terms of market, route to market and all that. And my third question is on volume growth. You had mentioned that you experienced volume growth across all segments. I just want to understand if that is relating to your legacy UAC Food products, snacks and the rest or if that applies across board that is including newly acquired CHI products?

Thank you very much, William. I think you have 3 questions. I've captured them here. First was the specific actions that drove margin improvement. In a business like ours, there will be thousands of small things that go into improving margins, which we won't have enough time to go into today. But if I sort of distill the biggest levers, you may recall if you listen to the call post the CHI acquisition that we thought we got a very, very good business and that we were very impressed by the quality of the team at CHI. So if I -- I think the single biggest initiative for sort of stepping back as a team and setting our goals and objectives, of which margin improvement was one of them. And the various leaders of the business came up with dozens of initiatives around procurement, energy optimization, packaging optimization, route-to-market optimization, pricing and it's a combination of these thousands of decisions that resulted in the progress we've seen so far. But I will stress that the quality of the team and the shared ambition and objective to drive the margins is perhaps the biggest step we took. Maybe I should also add that we tweaked the incentive system so that everyone in the company, every single person in the company is incentivized to -- by profitability to deliver these margins. And Zuri sits within what I'll call the, let's call it, innovation department within Food & Beverages, it's still very, very small. I would reckon it's probably going to be a fraction of a percent of our group revenues. And what the team is testing is twofold is, are there gaps in the market in terms of offering -- product offering, so from a flavor perspective and where these gaps exist, can we effectively serve them using our existing distribution framework. So it's very, very early days. I think launched less than a year ago, and we're going to monitor and see how that evolves if there are any big gaps and if we are well placed to serve those gaps. By volume growth across all segments, we refer to our big segment of Food & Beverages, CHI and UAC Foods, Paints and the like. We wouldn't go into the specifics of what happened with SuperBite versus Gala or [ 50 versus 120 ]. But across all the big segments, we saw volume growth.

[Operator Instructions] The next question is from Onome from Green Ticker. What's behind the soft Q2 numbers for CAP PLC?

You may recall that I said we saw a reversal in conditions in the market in Q2, where the price of petrol spiked meaningfully and transportation is a big charge on the consumer wallet. So we don't know for 100% certain, but we suspect that this may have contributed to CAP's Q2. Now on the positive, one of the things that CAP has focused on doing over the last few years has been broadening the product portfolio to introduce more affordable offerings at the right margin, and it's one that we've talked about quite a bit. And if you look at the prices of CAP's products, you have almost a factor of 5 in certain cases between the cheapest and the most expensive product. And a big initiative done in the second quarter was the launch of Dulux Spruce. So we get the benefit of the Dulux HALO in a mid-tier segment that is roughly half the cost of the traditional decorative Dulux. And one of the things we're trying to do is set our companies up to do well, at least survive regardless of what macro hits we take, and that's what we're trying to do with the Paints business. And we're working on an even more value products, but that wouldn't be ready for a few more quarters.

[Operator Instructions] We have a question from Williams in the chat box and he asks, are you likely to make a decision on your QSR business in the medium term?

On the QSR business, our focus has been on sort of fixing the base of the business, and we have made considerable progress. We're still very, very far from where we want to get to. I think the loss rate has more than halved in that company. We will continue to try to sort of get that business fixed and then take a decision. If long term -- if medium term is sort of 3 years, I mean, yes, we would have either meaningfully scaled that business or come to some other conclusion. But the focus now of the management team is on fixing the core of the business and the team there has done a pretty good job of shifting the trajectory, which we have not been able to do in a few years, even now.

[Operator Instructions] The next question is from [ David Zachary ] from Cordros Capital. And he asks, beyond the benefit already reflected in the business, are there any specific operational or commercial synergies that the management expects to unlock from the acquisition that will contribute to additional uplift in earnings in the near term?

Thank you, David. I think if you look at Slide 12, we've in the half year, taken the margins of the business we acquired from 2% to 15%. So that's a 13% uplift, and it's on a roughly NGN 500 billion revenue base. So we think we've already unlocked quite a bit of profitability from the business. As I said, we don't think -- we haven't stopped and we expect some bumps in the road. We -- CHI still has lower margins than UAC Foods and in very, very similar sectors. So we still see some more room. But just to color, we've already made what we think is meaningful progress and even ahead of what we expected. And we feel that if we keep on doing the things that we did and that took us from 2% to 15%, we would see a little bit more come through by profitability in the business.

The next question is from [indiscernible], who asks, we observed a quarter-on-quarter decline across key financial metrics from revenue to PAT despite the CHI acquisition. Could management elaborate on the key factors behind the sequential weakness and whether this should be viewed as temporary? What should be our expectation for H2?

Okay. So just to call 2 things out. The CHI acquisition hasn't -- wouldn't affect the quarter-on-quarter comparison we had CHI in both Q1 and Q2. So there will be no comparison there. Yes, if you look at the revenues in Q1, just NGN 191 billion and Q2, NGN 173 billion, it is lower. And like I said, in Q1, we had macro tailwinds. So not only were we doing what we could to grow the business, we're also getting benefit from an improving macro. In Q2, that reversed. So we continue to do what we could to drive the business, but there were meaningful headwinds we had to contend with. And in what we do, the price of petrol is extremely important -- consumer spending power is extremely important. Now we have multiple growth initiatives, sort of category extensions and the like that we are constantly working on. The timing for these is uncertain, maybe a quarter and maybe slightly longer. But our overall view remains that of strong optimism around the growth -- the continued growth of the business. And in certain areas, we are constrained for growth on account of capacity, and we've already committed the CapEx to put that capacity on stream. So long term, we're very optimistic about the growth. Quarter-on-quarter, these things change. As regards to H2, we unfortunately don't give earnings guidance.