Good morning and good afternoon, ladies and gentlemen. Welcome to UAC of Nigeria PLC's full year 2023 results conference call. Please note that this call is being recorded. This conference call will be hosted by Fola Aiyesimoju, the Group Managing Director of UAC of Nigeria PLC, and Funke Ijaiya-Oladipo, the Group Finance Director. Following prepared remarks by UAC's management team, there will be an interactive question and answer session. I will now hand the call over to Fola Aiyesimoju. Please go ahead.
Thank you, Temitope. Good day all. I have lost my voice at the most inopportune time, but will do my best to be audible. Please turn to page five. For the financial year 2023, UAC recorded revenues and profit before tax of NGN 120 billion and NGN 12.3 billion respectively. Our profits included one-off gains from asset divestments and our treasury portfolio. Over the course of today's presentation, we'll provide color on the operating environment in 2023, discuss initiatives we executed over the course of the year, share insight on our financial performance, and talk a bit about the outlook for 2024. Our performance in 2023, in spite of challenging conditions, reflected the strength of our brands and distribution, management teams, risk management initiatives, and capital allocation decisions. Please turn to page seven.
Operating conditions in 2023 were very difficult, with low growth, currency devaluation, foreign exchange scarcity, and high inflation. In addition to these, I'm sure we all recall the very challenging first quarter of the year, during which the effects of the attempted currency redesign program and election-related uncertainty were most acutely felt. The elections were thankfully successful, and while we're by no means out of the woods as an economy, we're encouraged by the current policy direction. Page eight reflects the impact of inflation on our businesses with continued escalation of raw material prices, as well as distribution and energy costs. Please turn to page 10. Our primary focus in 2023 was on driving performance in spite of economic conditions. In addition, we executed a number of important initiatives.
We merged and integrated Spring Waters Nigeria Limited, producer of Swan Water, with its parent company, UAC Foods, such that the businesses now operate as a single entity. We unlocked NGN 9.2 billion via the sale of non-core assets to bolster group liquidity, which we feel is important given the current economic conditions. We appointed Yemi Oloyede as Managing Director of UAC Foods, and he has had a very good first year. Debola Badejo returned to the holding company to drive our investment efforts, with Ufuoma Ogeleka being appointed General Manager at UAC Restaurants. We streamlined group governance and I now chair the board of directors of our businesses, CAP, Grand Cereals, UAC Foods and UAC Restaurants. On page 11, we reflect our brands.
We are firmly of the view that our performance under what were very difficult conditions is directly related to the strength of these brands in our portfolio. We had a very successful launch of a new subsidiary brand, Kingsway, which is trading strongly. Page 12 reflects our nationwide manufacturing footprint and distribution that supports our brands. These contributed to the improvements in key metrics reflected on page 13. We recorded revenue growth, gross margin expansion, improvement in operating margins across all our key segments. We will take the business specific updates on page 14 as read, and Funke will run us through details on our financial performance.
Good afternoon, ladies and gentlemen. Please turn to slide 16, which provides an overview of the group's financial performance. UAC Group recorded consolidated revenue of NGN 121 billion in 2023, which is 10% higher year-on-year from the NGN 110 billion recorded in 2022. Performance in the first half of the year was characterized by slower top-line growth, which was impacted by limited trading during the general elections and scarcity of cash, which affected consumer demand. In the second half of the year, we recorded stronger performance across all operating segments and delivered double-digit growth in revenue, gross profit and operating profit. From a segmental perspective, our Animal Feeds and Other Edible Segment, comprised of Grand Cereals and Livestock Feeds PLC, recorded revenue of NGN 67 billion, and this increased by modest 2% year-on-year and was largely driven by price increases to offset rising raw material costs.
Our Packaged Food and Beverages Business, UAC Foods, revenue was NGN 29 billion, which is 23% higher year-on-year. The growth was on account of higher volumes recorded in the snacks category, which was supported by existing brands as well as the launch of a new brand, Kingsway Pastry Roll. It was also supported by volume growth in the Swan Natural Spring Water category, as well as price reviews across board. The revenue from our paints business, CAP Plc, was NGN 24 billion in 2023. This is 24% higher year-on-year and was achieved as a result of the positive impact of the company's growth strategy on volumes, as well as price increases. At our Quick Service Restaurant Segment, it recorded a 21% revenue growth year-on-year, and this was driven by increase in sales from our company-owned restaurants.
In terms of operating profit, UAC Group recorded NGN 9.1 billion in 2023, compared to an operating loss of NGN 2.4 billion in 2022. The improvement in profitability is attributable to three factors. The first is the top-line growth across our operating segments. The second is the gross profit margin expansion, particularly at our Animal Feeds and Other Edible Segment and our Packaged Food and Beverages Segment. The gross profit margin expansion was achieved due to deliberate cost-saving initiatives implemented to reduce conversion costs and energy costs across those businesses. There was also a focus on operational efficiency initiatives, and this was aimed at limiting the impact of the higher distribution and haulage costs experienced during the year. The third factor supporting our improved operating profit was the gain we recorded from the sale of non-core property assets.
Across the group, our operating expenses were 17% higher year-over-year. This increase reflects the impact of inflation on our expenses, as well as the effect of the naira depreciation on expenses that are pegged to the foreign currency. Our profit before tax was NGN 12.3 billion, compared to the loss before tax of NGN 4 billion recorded in 2022. This was supported by the improvement in our finance income and profitability of our associate companies. More specifically, the group recorded net finance income of NGN 2.4 billion in 2023, compared to a net finance cost of NGN 2.1 billion in 2022. Our finance income was positively impacted by higher cash balances as well as gains in the treasury portfolio. The share of profit recorded from our associate companies was eight times higher at NGN 860 million compared to the NGN 103 million recorded in 2022.
This was driven by the expansion of MDS Logistics transport business as well as the profit recorded at UPDC Plc, our real estate business. We recorded NGN 3.8 billion in free cash flow, and our return on invested capital for the year was 20%. Please turn to slide 17, which provides additional context on the key drivers of operating profit in 2023. Our underlying operating profit, when adjusted for the non-recurring gain from non-core property assets, was NGN 2.1 billion. This is an improvement when compared to the operating loss of NGN 2.4 billion in 2022. The improvement was a result of the higher revenues recorded in our segments, the cost initiatives, which more than offset the impact of inflation across the group. Please turn to slide 18, which shows a snapshot of the group's financial position as at the year ended 31 December 2023.
The group has net assets of NGN 53 billion, which is NGN 8 billion higher year-over-year. The increase can be largely attributable to the higher cash balance, which was generated from the disposal of non-core assets throughout the year. Our net debt at the end of the year was NGN 2.2 billion. Total debt across the group was NGN 27 billion. This amount is largely short-term in nature and used to support working capital across our businesses, particularly the animal feeds and other edible segment. We're conscious of the impact of finance costs on profitability, especially given the recent increases in the monetary policy rate. Continuously seek to optimize funding costs across our businesses. Across the group, our capital expenditure for 2023 was NGN 4.7 billion. This was largely concentrated in the packaged food and beverages segment.
The investment represents the final phase of a bottling line that was installed to increase capacity of our spring water business in the first quarter of 2023. Looking at our cash cycle, this increased slightly versus what we recorded in 2022. That is reflective of the increase in advance payments at our various businesses to lock in favorable prices and to mitigate against the impact of increasing prices. I will now hand the call back to Fola so he can take us through the next section of the presentation.
Thank you, Funke. Please turn to page 20. We propose a dividend of NGN 0.22 per share, the same as was paid last year, and plan to hold our annual general meeting on the 20th of June. In conclusion, on page 21, we expect economic conditions to continue to remain difficult over the course of 2024, and we'll focus on maintaining margins via supply chain efficiencies and proactive pricing. We will seek to alleviate the impact of inflation on our employees by improving salaries and work conditions, and ramp up our efforts to attract and develop leaders for our businesses. Thank you for listening to the presentation. I will now take questions.
It is time for the Q&A session. To ask a question, please raise up your hand or type in the chat box. Kindly introduce yourself and the organization that you represent before asking your question. Your first question is from Chidinma. Please go ahead, unmute yourself and ask your question.
Okay. My name is Chidinma. I'm a Fund Manager at Access Pensions, and I just have two questions. Sorry? Okay. Thank you. The first question is, with respect to the conversion costs at the animal and edible segment, could you please speak more to the actual cost management strategy that was implemented in the animal and edible segment? The second question I have is, if you could just help with the percentage of raw materials which are sourced locally and the percentage of raw materials sourced internationally across the big business segments, just to get a picture of foreign exchange exposure with respect to raw materials. Yeah. Thank you.
Thank you, Chidinma. I think your first question was around efforts to reduce cost of the animal feeds business. I think you specifically talked about conversion costs. In addition to conversion costs, there was a change in the route to market that meaningfully reduced distribution expenses. From a conversion cost perspective, I would say the two biggest things were, one, a change of energy source, introducing biomass to fire boilers, which is cleaner and cheaper than using diesel or heavy fuel oil. The second was just very many small production efficiency shift management, ensuring longer runs for bigger SKUs and the like. These several incremental gains resulted in the overall improvement in conversion costs. Your second question was around % of raw materials sourced locally. I would say that by far, the bulk of our raw materials across the group are sourced locally.
I think it's important for you to note that some of these raw materials are imported and we buy them from domestic companies, but we do very little import. The only business that does meaningful importation of raw materials is our paint business. There I'll put the number at around 40% or lower. Chidinma, I hope.
Thank you for that.
Okay. I've answered Chidinma's question.
Your next question is from Onome. Please unmute yourself and go ahead.
Okay. I'm unmuted now. Good afternoon. I'm Onome, I'm an Analyst with Money Africa. I have a couple of questions. One, for your QSR business, I say in line with increased costs everywhere, do you have a timeline for when you break even? That's one. Do you have an update? I know at the last call you had a number of restaurants you were looking at opening. Any update as to how many were opened last year and how many you expect to open this year? That's for the QSR. Two is for the paints business. I also remember at the last call, there was to be an expansion, I believe, into some paint line that would generate FX. Is there any progress for that? What are the plans for the current financial year?
Three, for the foods business, what's been the response of the market to the new product? That's one. How are you managing the cost pressures generally? Are you facing pressures from the commodity side of things? Both for the foods business and for the feeds business as well. Thank you.
Thank you, Onome. I have three questions. On QSR, what is the timeline to break even, and what's the outlook for opening restaurants? For paints, what are efforts to generate FX income? For the food business, market response to new product, and how we're dealing with commodity or with raw material cost increases. Do these capture your questions, Onome?
Yes, they do. Yes.
Okay. For the quick service restaurant business, we have about 30 restaurants open currently. There are two formats. There are what we call the big corporate stores, there are the express stores. Our plan last year was to double that footprint, we meaningfully slowed down our pace of expansion. This was tied to, I guess, the first point you raised, which was meaningful escalation in cost, in particular, energy costs. We felt it was important to get a firm handle on the standalone economics of each store before continuing to accelerate the pace of store openings, which we're doing. Do I have a timeline to break even? We have a target to break even, and we're hoping to get this business at or close to break even within the next 12 months. To achieve this, we'll need to do two things.
One is implementing some of the initiatives that we've put in place to manage energy costs at the restaurants. Two, we think we still need to at least double the footprint of profitable stores to get this to break even. On the paint business, there are two avenues for us to generate foreign exchange income. The first and easier is to scale our marine and protected business. We have a business that has been, so far, sort of played second fiddle to the decorative business. Last year, we got full accreditation from the Nigerian Content Development Board, and that should meaningfully improve our ability to expand our offering in the oil and gas sector. This is an FX-linked business. We've recruited an individual to begin efforts to try to export product in the region, and the person we recruited is currently based in Cameroon.
That's the secondary thing that we're doing to try to grow some FX income from the paint business. On the food business, the new product we launched was Kingsway Sausage Roll. I need to credit Yemi and his team. I think it's trading far ahead of my expectations. As we know, Gala is clear number one and Kingsway, which was launched just over six months ago, in some months already begins to occupy the number three position in the market. It's trading very well. I think it's testament to the effort of Yemi and the team at UAC Foods. We see price escalation everywhere across our businesses. You spoke about food and feed in particular. What we are is we're very disciplined around pricing and protecting our net margin, which is the sort of selling price minus material costs.
I think those efforts have so far translated into the improved profitability we recorded last year, we continue to keep our eye on the ball to maintain this pricing discipline going forward. You recall when I went through the presentation that I think the foundation for this improved performance was the strength of our brand and distribution. There's no way you can effectively dictate pricing if you don't have the kind of market-leading brands and nationwide distribution reach that we do.
Your next question is from Uthman. Please go ahead and unmute yourself. Uthman, if you are speaking, we can't hear you, please.
Hello, can you hear me now?
Yes, we can.
Yeah. Sorry about that. I wanted to ask about the profit on property sales. I noticed it made a considerable amount to the bottom line. Could you please shed some light onto that? Sorry, Uthman from Stanbic IBTC.
Very clear. Funke, do you want to take that question?
Okay, thanks. I got the question. I think you asked about more information on the property sales. I think you would have also seen in our results last year that one of our strategic initiatives is to essentially exit what we consider non-core
assets. Non-core assets are certain properties that UAC holds across the country. In line with that strategic initiative to unlock liquidity from low yielding assets, we embarked to sell some of these assets, and that's the one-off profit you see in 2023.
Your next question is from Uwa Okoro. He asks, "How does the business plan to mitigate the challenges posed by FX this year? Please, can you give more details on expansion plan for the paint business? Margins declined in 2023 when compared to 2022.
Okay. In terms of dealing with FX challenges, I think there are two things that are within our control. One is continuing to try to find alternatives, raw and packaging materials at lower costs. We had some success with that over the last 12 months. The second is to be disciplined around pricing. I think the important thing for us is that, given our position in our various markets, where we're mostly the market leader where we play, anything that affects us affects the rest of the market. We found that once we've been disciplined with pricing to maintain margin, we've been fine in terms of generating profitability in spite of rising FX. We wish it was more stable, but we try to manage it by looking for alternatives and having pricing discipline.
Paint business, yes, the margins were low last year, but if you follow that business, you would see that it is growing extremely fast. It was a business that was sort of flat in revenues for about five years and has probably tripled in size over the last three years. This requires meaningful investment in distribution, color centers, and a sales force to manage that increased retail footprint. There's a lag between investing in this improved reach and the profitability coming through. Two, we continue to expand that business very aggressively over the next few years because we believe there's still opportunity for us to take.
Thank you. Your next question is from Sunmisola, who works with CSL Stockbrokers. Sunmisola wants to know if the company is in a position to earn more from its exchange gain in 2024. She also wants to know if volume of production has been affected by the increase in commodity prices.
The short answer on whether we would earn more in exchange gain this year, I don't know. We're not a financial institution, so we don't think about foreign exchange as a profit or center. We try to make sure we have enough to meet our procurement needs for technical raw materials, new plant and equipment, and so on and so forth. I keep stressing how we make sure we price. We're in the business of selling consumer goods profitably, make sure we price those profitably, regardless of the FX regime. We think about this more from a keeping our business going and risk management than trying to make money on or out of FX. It's not our core job.
Around volumes, we have been surprised that over the last 12 months, where we've increased prices meaningfully in response to rising commodity prices, we've seen volumes hold or increase across our paints business, across our foods business. The one area where we saw a dip in volumes was in the animal feeds segment of Grand Cereals. In the edible segment, we saw massive growth in volumes. That, I guess, is a combination of much higher prices as well as the challenges you would have read about in the Nigerian poultry farming industry.
Your next question is from Temiloluwa. Please unmute yourself and go ahead.
All right. Thank you. Good afternoon. I'm Temiloluwa Oyenuga with Meristem Securities. I wanted to ask, in regards to your animal feed segment, I know that that segment has been pretty challenged for a couple of years now. Even looking at the revenue performance, it has been on the decline for the past three years. I think this year was just about 1.5% growth in top line for that segment. That, of course, seems like a major part to total revenue. What's the company's plan on that particular segment? What are we trying to do to boost performance and increase profitability? I think the second question is in regards on the FX. I know you just mentioned, someone just asked about it, but I want to get more clarity about that particular aspect. It was a major contributor to bottom line in 2023.
For 2024, are we expecting that much of, let's say, FX gains that the company will retain for 2020. Are we expecting that significant amount again for 2024? I don't know where you go. I'm going to guess no.
Okay, thank you. I think on feeds, you point out that revenue growth was slow. You would see that the swing in profitability of the feeds business was quite meaningful. I think it's because of an increased focus in that segment on driving the higher margin parts of the business. We're not trying to just grow scale in the feed business for the sake of scale. We're trying to drive profitability. To do so, I think the highest margin segment of our-- because the feed's an edibles business, and we've historically, I think, largely focused on the feed side, is by growing the edibles, which is our pure soya oil and our cereals in that business. Also even within the feed segment, there are higher margin if you focus in sort of the higher quality feed niches, you would have lower volumes, but higher margin.
I think our focus there is not on volumes or revenues, our focus is on profitability. So far, we've seen those results come through, and that is going to be our continued focus in the near future. On FX, I think what we successfully did in 2023 was avoid losses. We tried to almost under no circumstance, keep foreign exchange liabilities. We tried to get foreign exchange to buy the things we need to buy. I don't have a better answer. We don't budget or plan or strategize to make FX gains. We try to avoid losses, which is risk management, and try and make sure we have enough for what we need, and price to make money regardless of whether or not the FX is NGN 1,000 or NGN 2,000 to a dollar. I'm sorry I don't have a clear answer, but we're not a hedge fund.
We don't run to make money on FX. We try to avoid losses, not try to make money from FX.
Your next question is from Dean. Please unmute yourself and go ahead.
Hi, my name is Dean Tlotleng, an Analyst from Steyn Capital Management . Thank you for hosting this call today. I have three questions on my side. There's been some recent strength in the currency from about NGN 1,700 to about NGN 1,300, and there's some news as well that the queue has been cleared. My question is, have you been able to source FX and are you able to access this FX market? Second question is, which of your businesses are you most positive about for 2020 and beyond, and why? Third question is, you lightly touched on some of the things you've done to simplify the group structure. Can you sort of give us an idea on what further plans you have for 2024 to further simplify the structure?
Just the last question from my side is, what are you currently seeing on the ground in terms of the Nigerian consumer? Thank you.
Okay. Thank you, Dean. I think your first question was around, what we're seeing around FX and ability to source.
I would say because the market has been somewhat liberalized, yes, if we bid for FX at the right rate, we get. We've seen a meaningful improvement in FX liquidity, experienced on the ground here. Next was which of our businesses are we most positive about? That is a quite impossible question to answer. What we do is we sit with the management teams of our respective businesses, we work with those management teams to develop strategies that we're excited about. The outcomes depend very much on what happens in the environment and the quality of execution. We're excited about the strategies that are in place for each of our businesses.
The challenge is to work with the management teams or support the management teams, I think they do most of the stuff on their own, to execute those strategies and hope we get some tailwinds and not too many headwinds from the operating environment. In terms of simplifying group structure, it is not an event. It's something that is going to be constantly at the fore of our minds, which is how can we organize ourselves to be simpler. We don't have anything specific to announce now. We're a listed company, if we were going to make such an announcement, there's a procedure we need to go through. Simplifying the group structure is core to the way we run the business, it's not a one and done.
The Nigerian consumer is stressed, I would say that for me, the biggest takeaway from the current environment is surprise at the resilience of the consumer. We see a meaningful disconnect between the expectation of what the consumer should be doing and the experience reality on ground. Which I think is testament to the resilience of that consumer.
Thank you.
Your next question is from Chidinma, who asks, "Do we expect to see more of this sizable strategic sale of non-core assets this year and beyond?
I think I would link the response to what I just responded to Dean, in that a core part of our strategy, one of the things we spend time on at the holding company, is capital allocation. Which is thinking, where is our capital currently concentrated? Is there a rationale to move that capital from a particular use to what we feel is a reuse that gives us a better risk return outcome. Last year was real estate. It was not an operating company, so it was non-core real estate. We don't anticipate any similar moves from a non-core real estate perspective. We continue to work on the rest of the group and ask the question continually, where is our capital tied up? Then, is there scope to reallocate this capital?
Thank you. To ask a question, please raise up your hand or type in the chat box. Kindly introduce yourself and the organization that you represent before asking your question. There are no more questions. I will now hand the call back to Fola Aiyesimoju for his closing remarks.
Thank you, Temitope. I thank everyone for participating in the call and for the questions, and I wish you a wonderful rest of the day.
That concludes the UAC of Nigeria PLC full year 2023 results conference call. Thank you for your participation. You may now hang up.