UAC of Nigeria : UACN FY 2021 Results Conference Call Transcript

UACN FY 2021 Results Conference Call Transcript NSE Ticker: UACN

UAC of Nigeria PLC: FY 2021 Results Conference Call Transcript

Date: Wednesday, 6 April 2022 3:00 PM WAT

Presenters:

• • Mr. Fola Aiyesimoju (Group Managing Director, UAC of Nigeria PLC)

• • Mrs. Funke Ijaiya-Oladipo (Group Finance Director, UAC of Nigeria PLC)

Moderator:

• • Mrs. Chiamaka Uwaegbute (Investment Associate, UAC of Nigeria PLC)

1. Presentation

Moderator: Good afternoon, ladies and gentlemen. Welcome to UAC of Nigeria PLC's Full Year 2021 Results Conference Call. This conference call will be hosted by Fola Aiyesimoju, Group Managing Director; and Funke Ijaiya-Oladipo, Group Finance Director. Please note that this call is being recorded. Following prepared remarks by UAC's management team, an interactive Q&A session will start. I will now hand the call over to Fola Aiyesimoju.

Fola Aiyesimoju (UAC Group Managing Director)

Introductory remarks

Good day all and thank you for making time to participate in our result presentation. In our prepared remarks, Funke and I will discuss our operating environment, provide updates on our strategic initiatives, share insights on our financial performance and discuss our outlook.

Macroeconomic review

We start on slide 5. In 2021, Nigeria's economy returned to growth following the COVID-19 triggered recession in 2020. Key concerns remain around inflation and foreign exchange, with foreign exchange concerns including availability and pricing.

On slide 6, we outline the effect of base inflation combined with supply chain disruptions, which resulted in input cost escalation far over the reported headline inflation. In our animal feeds business, prices for maize and soya beans increased by 50% and 100% respectively. In our paints business, the price for resin increased by more than 100% and there were increases by over 50% for flour, milk, and sugar impacting our packaged food and beverages, and quick service restaurants businesses. Unfortunately, the trend has continued into 2022.

In a nutshell, the biggest issues we are grappling with are cost escalation and supply chain disruptions.

Please turn to slide 7. The net impact of rapid escalation in costs has been pressure on gross margins, resulting in margin compression across all businesses. We partially offset this by reducing operating expenses to sales ratios across board and continue to pay very careful attention to pricing and gross margins in light of the continued high inflationary environment.

In the next section, we provide updates and strategic initiatives implemented in 2021.

Strategic initiatives in 2021

A recent focus for us has been on simplifying the group structure, resulting in the sale of controlling interests of two of our businesses, UPDC PLC and MDS Logistics.

In 2021, we made further progress by successfully merging and integrating our paints businesses, CAP PLC and Portland Paints. This merger is complete and the fully integrated business operates seamlessly.

We acquired 49% interest in UAC Foods owned by Tiger Brands who were very supportive partners during the time of our joint ownership. Increasing our stake in UAC Foods is in line with our strategy to simplify the group by exiting non-core businesses and doubling down in core growth areas.

Finally, we completed the unbundling of UPDC REIT units to UAC shareholders and you should have received REIT units as well as a small dividend between December and January this year.

An outstanding question relating to our structure is as regards our animal feeds businesses. Our two businesses in this segment, Grand Cereals Limited and Livestock Feeds PLC have limited geographic overlap, which is positive in the context of a potential merger but are configured to deliver different value propositions to end customers. Resolving the question regarding long-term ownership and structure for Grand Cereals Limited and Livestock Feeds PLC is a key focus area for us.

Please turn to page 10. We have made meaningful investments in our core IT infrastructure. Specifically, we invested over NGN 200 million in the migration from an on-premise Microsoft Office 2016 application to the cloud-based Office 365 enterprise productivity tool. We are in the process of migrating from an on-premise physical server-based SAP ECC ERP system to the cloud-based S4 HANA. This is a more than NGN 2 billion investment that we expect will go live in July 2022. It is one of the most important initiatives we are embarking on as we get the dual benefit of improved processes by adopting SAP, best practices, and superior technology.

On slide 11, we outlined the initial steps we have taken as regards introducing a digital component to the holding company. We made three small investments in this regard in 2021.

We invested in Ventures Platform, the leading venture capital fund in the region, and hope to work closely with and learn from Kola and his team as they seek to invest in more than 50 of the best technology-enabled businesses across Africa. We made a direct investment in Touch and Pay, a micropayments business that was recently accepted into Y Combinator, and also invested in Kandua, a marketplace connecting artisans with end customers.

Given the shift from the industrial to the information age, we feel that these investments are important to UAC's long-term future.

Finally, on slide 12, we outline work done on employee incentives. We feel that attracting and retaining the right quality of talent is by far the biggest constraint to our growth. As such, we have implemented initiatives tailored by each entity to align employee and shareholder interests.

At the holding company, our view is that reward must be directly linked to shareholder experience. As such, we have implemented a scheme that provides HoldCo employees with a share of the total value created above an 18% return threshold.

At the subsidiaries, we have designed schemes linked to operating profit. Companies that meet their operating profit targets qualify for 40% of their performance incentives, but the remaining 60% are dependent on specific KPIs. For more junior employees, incentives are paid quarterly, while management incentives are paid annually.

For UAC Restaurants, a business going through a complete business model shift from a 100% franchise model to majority corporate stores. We have put in place management incentives tied to delivering on a 5-year business plan.

I will pause here and Funke will take us through the 2021 financial highlights.

Funke Ijaiya-Oladipo (UAC Group Finance Director)

Thank you Fola, and good afternoon, ladies and gentlemen. Please turn to slide 14.

UAC is a holding company and our interests are organised along four key verticals which are animal feeds and edible oils, packaged food and beverages, paints, and quick-service restaurants. We also have non-controlling interests in a leading logistics services provider and a real estate development company, which can be exited over time.

In 2021, there were three key changes to UAC's group structure. The merger of our two paints businesses to form an enlarged CAP PLC, the increase of our stake in UAC Foods from 51% to 100%, and the distribution of UPDC REIT units to UAC's shareholders.

One of our objectives is to drive long-term profitable growth in our core platforms and in 2021 the group recorded significant topline growth of 25%, above the historical average growth of 3% to reach NGN 101 billion. Our focus on driving growth can be categorized into two parts: our core operating platform, comprised of our subsidiary companies across our four key verticals, and the second part is our recent investments in technology-enabled businesses.

In 2021, all of our four operating segments recorded topline growth above the historical growth rate, which is encouraging, and this was achieved by a combination of price and volume increases across each segment.

Group financial performance

Please turn to slide 18, which provides an overview of the group's financial performance, comparing the full year results for 2021 with 2020.

The results are mixed because the group recorded meaningful topline growth of 25% year on year to reach 101 billion as I mentioned earlier. However, operating margins of our businesses were impacted by raw material price escalation and the higher cost environment. We did achieve some operational efficiency as reflected in the improvement in our operating expenses to sales ratio by 184 basis points.

The group recorded operating profit of NGN 5 billion in 2021, which is 50% higher than the NGN 3.3 billion recorded in 2020. However, when we adjust for certain one-off and nonrecurring events at the holding company, the underlying operating profit of the group is flat year on year at NGN 3.2 billion and I will touch on that on the next slide.

Group profit before tax was NGN 4.1 billion, 18.5% lower year on year, and profitability was impacted by higher finance costs as a result of increased short-term borrowings in the animal feeds and other edibles segment, to support efforts to build inventory.

Profitability was also impacted by losses recorded by our associate companies, UPDC and MDS in 2021 versus a profit from associate companies in 2020. Group earnings per share from our continuing operations was 63 kobo, this is 9% lower than the 69 kobo recorded in 2020.

Key drivers of Group operating profit

Please turn to slide 19. The slide aims to provide additional context on the key drivers of operating profit across the UAC group between 2020 and 2021. The group recorded a NGN 1.5 billion increase in gross profit, driven by increased sales across all operating segments, offset by the increase in the cost of raw materials.

At the holding company, there was NGN 1.5 billion increase in dividend and other income specifically attributed to the following:

Dividend income of NGN 245 million from UPDC REIT, which has now been distributed to UAC shareholders. There was a fair value gain of NGN 324 million recognized on the distribution of UPDC REIT units, representing the difference in the carrying value and the market value of the REIT on the date of transfer to shareholders. There was also an increase in the fair value of investment properties at the holding company.

Our businesses were not immune to the escalating cost environment and recorded a NGN 1.5 billion increase in operating expenses. When you adjust for the events at the holding company, as mentioned earlier, the Group's underlying operating profit was broadly flat year on year.

Group financial position (Balance sheet and liquidity)

Please turn to slide 20, which shows a snapshot of the group's financial position as at 31st December 2021. The Group has net assets of NGN 51 billion, the year-on-year movement reflects the impact of the unbundling of UPDC REIT units as well as the impact of the purchase of additional shares in UAC Foods on cash and on noncontrolling interests.

There have been price escalations in key raw materials across our businesses as well as supply chain disruptions, so over the course of the year, we deliberately increased working capital to mitigate the impact of rising input costs, especially in the animal feeds segment and our paints business to ensure sufficient raw material availability to continue production.

As a result, inventory increased by NGN 16 billion and this was funded by short-term debt, which translates to a Group net debt position of NGN 8.5 billion from a net cash position in the prior year. At the holding company there is no debt, the holding company has NGN 4.4 billion in cash and holds over

NGN 2.2 billion in Eurobonds.

Capital expenditure in the period was largely concentrated in the packaged food & beverages segment where we continue to make investments to address inadequate capacity as well as investments in technology infrastructure.

I will now hand over to Fola, to take us through the next section of the presentation. Thank you.

Fola Aiyesimoju (UAC Group Managing Director)

Operating segment overview

Thank you, Funke. Please turn to slide 22. As Funke outlined, our core focus is on driving growth. For UAC Foods, which has three segments, snacks, water, and ice cream, we are recording growth across all segments meaningfully above the historical trends. In the snack segment, we are nearing capacity and are in the process of the detailed design for a new factory.

A very important initiative we executed last year was the migration to NGN100 price point from a NGN50 price point. Before 2021, the NGN100 price point accounted for about 6% of the Gala portfolio. On account of initiatives implemented last year, that NGN100 SKU comprises more than 60% of the Gala portfolio.

We rolled out five hundred (500) freezers to drive growth in the ice cream business and are deploying a further thousand (1,000) freezers and exploring the acquisition of additional cold trucks to deepen distribution.

For water, we cannot meet demand and have acquired a new line which is going through final testing this quarter with the expectation of installation in the third quarter, we expect to triple volume capacity on account of this investment.

On slide 24, we focus on our Paints business, in this sector, the focus is on deepening distribution and broadening range, we are rolling out colour centers for both the Dulux and Sandtex brands and working closely with our technical partner AkzoNobel on expanding their product range. We see additional opportunities for growth in the marine and protective space and are also trying to build a project team to sell directly to large-scale construction projects.

On page 26, we focus on our Quick Service Restaurants business where the simple objective is rapidly expanding our corporate store network. We had 5 of these stores in 2020, 11 in 2021, and plan to double again this year to 22.

The most important objective for this business is the rolling out attractively located stores with excellent operations and good unit economics. We feel that by achieving this, the economics of the overall business will take care of itself.

Finally, on slide 28, we touch on our animal feeds business where we have a dual focus on growth and optimization. As we feel there is scope to improve margins and drive capacity utilization.

We have done a lot of work on product formulation over the last 18 months, which we expect to deliver improved performance to farmers and as a result, drive volume growth. We are also focused on the higher-margin segment of the business being edible oils and cereals.

I will now hand over to Funke to discuss our dividend proposal and outlook. Thank you.

Funke Ijaiya-Oladipo (UAC Group Finance Director)

Dividend Proposal

Please turn to page 30, which provides highlights of the recently announced corporate action. UAC's Board of Directors is recommending a dividend of 65 kobo per share, which amounts to NGN 1.9 billion and is subject to the approval of UAC shareholders at our annual general meeting, set to hold on the 22nd of June 2022. Qualifying shareholders may elect to receive new ordinary shares in the company instead of the dividend in cash. This election is to be made before the 14th of June and shareholders who do not elect for the new ordinary shares will receive cash.

Outlook

On slide 31 and in conclusion, we remain focused on our priorities, specifically focus on simplicity, improving our processes with technology, driving profitable growth, learning from our new digital investments, as well as making progress on increasing capacity for our snacks business.

We thank you once again for participating in the session today, and we will now be taking questions.

2. Questions and Answers

Michael McGaughy (Research Alpha)

Thank you very much for holding the conference call. My question is, one of the speakers had mentioned there is no debt at the holding company level. I want to know how much debt there is at the subsidiary and associate level and if it is consolidated or not? Are there SPVs or other similar debt instruments we should be aware of?

Fola Aiyesimoju (UAC Group Managing Director)

Thank you, Mike. I would provide a response and Funke will provide more detail. There is no debt at the holding company. The only companies that borrow are our animal feeds businesses, they borrow annually to fund working capital and typically cycle through this debt in each buying season cycle and there are no SPVs or any other off-balance sheet borrowing entities anywhere in the group.

Adewale Okunriboye (Sigma Pensions)

Good afternoon and thank you for the presentation. Congratulations on your numbers and I see your revenues are now above NGN100 billion. What do you think, between volume and price, where would you say more of the impetus came from in 2021? Because of the inflationary environment, it is likely there will be more price increases at your Animal Feeds businesses, will you say that was the big driver for growth? Over the next year, given the inflationary environment, how do you think we should be looking at your revenues, more scope for a price increase to drive revenues? That is my first question.

The second question, you mentioned quite a bit of the inflationary pressures, this is quite true and this hurts your margins. How do you see this evolving a year from now? My third question is, I see your presentation, you talked about simplifying your structure and you have done a bit around your major