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 would 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? There are four separate components to address. Our preparedness, the rarity of the opportunity, timing, and fit. We start with preparedness. We felt we were 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, 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 a 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 sleek 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 NGN and 9% annually in USD 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 NGX Consumer Goods 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. 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 orthodoxy, which are delivering results, energy reform, which has huge potential for Nigeria. Importantly, the removal of fuel subsidy, creating much needed fiscal space for investment 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. 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. Chi 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 started 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 two-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. It 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 number one or close number two 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 number two player with 38% market share, and the products here 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 number two player with 33% market share. Under the value-added dairy segment, we also have a drinking yogurt offering, in which we're the number one player with 43% market share. The evaporated milk and yogurt products are sold under the Hollandia brand. Finally, Chi has two brands in the snack space, SuperBite and Beefie, where the business with these two combined brands is number two with just over 30% market share.
In the 2024 final 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 counsel across two jurisdictions, and domestic counsel on our bid documents, 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.
We're grateful to our advisors for the hard work and dedication they put in and would like to specifically call out Standard Bank, WSTC, Fasken, and Templars who went above and beyond over the course of the transaction. Total consideration paid to the seller was NGN 182 billion, from 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 are to be incurred as we complete our refinance. We hedged our payment, which was denominated in dollars. 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 and ring-fence obligations, we set up a newly incorporated, 100% owned special purpose vehicle called UAC Food and 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 received 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. 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 U.S. dollar bridge facility over the next three months. Our objective is to transition into longer tenor naira debt, we aim to do so using a mix of two 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. In preparation for the bond, UAC has registered a 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. 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 maintains an investment-grade credit profile with an A rating from DataPro and an A-minus rating from Agusto & Co. To summarize, the acquisition was executed through a newly incorporated SPV.
It was funded with a mix of equity and U.S. 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. We've identified a clear set of value creation drivers in areas that UAC has a successful track record. We see two major risks inherent to 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 will focus on, over the long run, gradually shifting to some domestic procurement.
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. In 2024, Chi closed with 221 days of inventory. We'll leverage our experience from our similar business, which makes paints that has very similar sourcing characteristics to Chi, and to optimize this. By way of contrast, our paints business had approximately 90 days of inventory in the third quarter of this year. We see meaningful room to bring down the inventory holding days. Following the acquisition, our packaged food and beverages 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 two 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 groceries, where it is the number one player and Chi is the number two 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% -1 5%. Chi has similarly demonstrated very strong growth from a larger base, growing from NGN 171 billion revenue business to more than NGN 500 billion. Margins have however suffered, and addressing this margin disparity is our number one 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 worked with our advisors to work out what the optimal debt leverage, the amount of the company's debt capacity, and the number was fixed. It was a fixed NGN number, and which translates to 2.4x EBITDA.
We have historically operated with net cash, and would seek to be a bit more prudent and bring this down to around one and a half times. 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 related to working capital debt. 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 would 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 generation, which would be driven by margin improvement and working capital optimization. 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 NGN 30 million in divestment of non-core 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 generates NGN 67 billion of EBITDA before accounting for potential margin improvements, and this is well in excess of our debt service cost of NGN 57 billion or NGN 56 billion. As Funke mentioned, we are fortunate to be in a declining interest rate environment, which we'll 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 seek continued opportunities for growth in our businesses. Thank you, and we'll now take questions.
It is now time for the Q&A session. To ask a question, please raise your hand up or type in the chat box. Kindly introduce yourself and the organization that you represent before asking your question. To ask a question, please raise your hand up or type in the chat box. Kindly introduce yourself and the organization that you represent before asking your question. Your first question is from Oluwatomi. Kindly unmute yourself and go ahead.
Hello. Good afternoon, everybody. My name is Oluwatomi from United Capital. Just to ask, since UACN is listed on the exchange as a different entity, is Chi also expected to be introduced as a separate entity, or is the share going to be added to the UACN as a whole? Thank you.
Thank you, Oluwatomi. No, CHI is not going to be listed. It's 100% privately owned subsidiary of UAC. It'll be consolidated in UAC's numbers fully, but it's not going to be listed separately.
All right. Thank you very much.
Your next question is from Timay. Please unmute yourself and go ahead.
Good afternoon. My name is Timay Segbandio from USD2 Financial Services Limited. My question would be around debt to EBITDA that was mentioned earlier. Is the goal to maintain 1.5x EBITDA as the debt coverage, or what's the plan to kind of the whole future, how long does the vision look at winding down to the optimal working capital position? Thank you.
Thank you, Timay. I think it's important to note that, and I mentioned this during the course of the discussion, we didn't choose the 2.4 x that we have 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 1.5. I'm not sure that I would say that 1.5 is some scientific optimal level. That's what we would aim to do in the near term. Much longer term, it's a very cash-generative group and business. I expect that those numbers would come down, but I don't know the degree to which it'll come down below our short-term 1.5 level as the business generates cash.
Your next question is from Samson. Please unmute yourself and go ahead.
Hello. Hi. Fola, can you hear me? Can everyone hear me?
Yes, I can.
All right. Brilliant. Thank you, and 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, 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 mentioned term loan and bond. What are the prospects of equity financing to complement that?
I know 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 this some conversation that is being had internally or something that you would then change? My final question is on the asset disposal. Are there assets that have been identified? It looks like the grain 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 a disposal of assets like that look like? Are those conversations that you guys are considering? Those are my questions. Thank you.
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%, so we see no reason why as a starting point this business should not be there. That's the first and easier one. Timing, we are working very aggressively on this, 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. By the fourth quarter of next year, we want to be hitting these levels. We're working on it at a rapid pace. It's by far the biggest priority for the team today.
In terms of the sources, what we found is there are always multiple sources. The naked margins are obviously a big lever, you're right, it's the area that we start to focus on a lot. When you dive into SKU by SKU reviews, we generally find opportunities to improve our margin, we found some here and are already implementing. Clearly, we'll also look to find some efficiencies below the raw packaging material line to improve our naked margin. Term loan bond, you're right, is 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. You may recall that one of the questions we took historically was why keep so much cash on your balance sheet.
We don't want to find ourselves right back where we were, let's call it 12, 18 months from now. 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. We feel that the company's cash generation will pay this down over time. In terms of asset disposals, yes, we have identified assets to dispose given various sensitivities and discussions. I unfortunately cannot go into great detail on those now. I will say, for example, that we have quite large minority positions in companies that are not core to us. Over time, we'll look to realize value. There are a few other discussions that are going on in the group.
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 a manner that realizes value for our stakeholders.
Okay, thank you.
Your next question is from Emeka. Please unmute yourself and go ahead.
My name is Emeka Eke from Standard Chartered Bank. Once again, congratulations on this milestone acquisition. I have two questions. One, yes, I heard about the SPV that was used to do the acquisition. I just like to clarify the acquisition debt, where exactly they are going to sit. Is it on the SPV vehicle or on Chi Limited? The streaming of cash flows for servicing the debts of Chi Limited. Shed a bit more light on that. My second question is on FX risk, which you rightly pointed out. Based on the existing entities in the group, you have your FX policy, as it were.
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? Thank you.
We use an acquisition SPV, but the idea is to have debt sit as close to the operating cash as possible. 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. What we try to do with those businesses is avoid open positions. We avoid having mismatches and would adopt the same approach that we have used very well with CAP in managing this business.
If you no longer have a question, please lower your hand. Your next question is from Onome, from Greenticker, who asks, "Will you be considering an equity raise, what are the timelines to dispose non-core 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. 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. What I can say is it's going to be a management focus, so 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. I think I should add that realizing value from non-core 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 important point to stress, that the primary driver is more freeing up our time from having to provide governance, oversight, craft strategies, recruit management, 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. He writes, "Congratulations on the acquisition. Will there be any effect on UACN from the new tax reform bill or the change in capital gains 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. Anyone who's read the new tax act knows that it has extensive provisions around manufacturing companies, many of which benefit us, which we're studying, and by virtue of being a manufacturing company itself, Chi would also benefit. 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're clear on our focus areas. We're clear on what we find interesting. We've just made what is, at least for us, a very large acquisition. Our laser focus is going to be on delivering our value creation thesis from this acquisition.
As I clarified, by far the bigger driver of exiting non-core things is to free up the time to deliver on this value creation, strategy, for our core businesses.
Your next question is from Samson. Please unmute yourself and go ahead.
Hi, Fola. Samson from Zerust 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 2 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. Also perhaps talk to what the working capital relationship in your existing food business is and what normalized working capital for this business is. 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?
Yeah. We have started having those discussions internally because we now own the business and we're firmly in management. One thing that we try to avoid is, the word I'm now looking for is, we believe in evolution not revolution. 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 fell swoop, because then you can cause meaningful disruptions. The cash conversion cycle for the business, which is what is more relevant in this context, I believe is currently now about maybe 140, 150 days. We would look in the near term to bring that to between 100 and 120 days, then eventually bring that down much lower. It's a NGN 500 billion business, so 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.
Okay. Thank you. Thanks. I think that's clear.
The next question is from Muamar. Please unmute yourself and go ahead.
Hi. Can you hear me?
Yes, I can hear you crystal clear.
All right. Thank you. Thank you very much for this update call. I have three questions. The first one, 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 four years? Just related to that, what specifically UACN will be doing over the next one 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. Based on what you've seen, do you think there'll be a need to invest in the capacity? If so, have you incorporated that into your existing financing arrangements?
My last question is on the potential impact of MDS and Chi maybe insourcing 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? If so, what do you think that impact would be? Thanks.
Okay. For the margin, I can only give my hypothesis for why the margin has 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 peaked at 34% is unusual. It takes a laser focus on pricing and management practices that incorporate rigorous review of pricing at an SKU level to avoid margin declines. I'm not sure what the circumstances were. I don't know why that wasn't the case here. We've seen it broadly in FMCG in Nigeria. Some companies were able to laser focus and increase price and others were not. You saw that margin decline.
We've been here now for about six weeks, and there's nothing I've seen that reduces my confidence about the ability to certainly improve margins. All I can say is the target we set for ourselves, four 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 eight or nine. Maybe we get to 12 or 13, or maybe we exceed. 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. There'll be 1% or 2% that we can squeeze out, from an efficiency perspective.
In terms of CapEx, like I said, in terms of deciding the company's debt capacity, we took advice and there was a very detailed debt capacity model built, including CapEx. The business doesn't need meaningful capacity. It's very well invested. 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'll 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. In terms of MDS, the way MDS operates with our existing companies, and will operate with Chi is on a totally arms-length basis. It will pitch its services. If the team at Chi sees value, they may work together. If they do not see value, they don't work together.
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 in nowhere part of any of our plans, and it's not mandated.
Okay, thanks. Just a follow-up question, specifically on the pricing evolution. Looking at UACN food and beverages, you've managed to actually increase your margin significantly over the last two 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?
We've seen Chi has multiple competitors. Unfortunately, most are private. In juice, it was competing against 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've done well. We've done very well in our joint snack space. I would also say that we've seen Chi belatedly take pricing in that space and do very well. 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 two quarters of this year, and they've recorded meaningful increases in margin. I think most people eventually will get there. It's the speed and anticipation that varies by player.
Okay. Thank you. Just one last question from 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?
What the business has done very well is grow volumes. That's what it's done very well. Volumes have increased. 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. It's grown its volumes meaningfully over the standard.
Okay. Thank you. Thank you very much.
To ask a question, please raise your hand up or type in the chat box. Kindly introduce yourself and the organization that you represent before asking your question. To ask a question, please raise your hand up or type in the chat box. Kindly introduce yourself and the organization that you represent before asking your question. 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 USD exposure there?
Funke, do you want to tackle that? Shall I?
Thanks, Brad, for the question. The bridge loan is a U.S. dollar facility. We've entered a forward contract on that to protect against any volatility in the currency. It's a dollar bridge facility.
Funke, it's fully hedged. I think that's the question.
100% hedged. Yes.
The 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 three brands, Chivita, Hollandia, SuperBite, and Beefie. There's no intention to change any of those brands. The corporate name is Chi Limited. Also, no intention to change the corporate name. Just to be clear that none of the brands is Chi. They're all different brands.
To ask a question, please raise your hand up or type in the chat box. Kindly introduce yourself and the organization that you represent before asking your question. You have a question from Samson from Zerust, who wants some clarification on debt service costs. What assumptions goes into this full refinancing in NGN, 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.
To ask a question, please raise your hand up or type in the chat box. Kindly introduce yourself and the organization that you represent before asking your question. The next question is from Muamar. Please unmute yourself and go ahead.
Yeah. Thanks. 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. There are changes that occurred on account of the deal. Certain executives, CEO and CFO, were employees of The Coca-Cola Company, and by virtue of the deal closing, they were seconded to Chi, have returned to their parent. 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, 18 months.
Does that mean that you might have mentioned this earlier. Will Chi be functioning from a staff perspective as its own separate silo, or are you going to integrate it with part of the F&B team as well?
Chi is going to operate for the time being as a standalone company. There are arguments for and against to combine it with the other F&B company, there have been no decisions taken on that as of this moment.
Okay. Thank you.
Next question is from Similayan. Please unmute yourself and go ahead.
Yes. Thank you. My question is around net assets for UAC and the UAC Nigeria as a group. In the short term, quote-unquote, it declined. Was this decline due to this acquisition or what are we looking at going forward for in terms of net asset position in this immediate short term? Thank you.
Are you referring to our Q3 numbers?
Yes.
Yeah. Okay. If it was Q3, there'd have been a marginal decline, if memory doesn't fail me.
Yes, it's marginal.
Okay. That's yes. If that's what you're referring to, yes, it's transaction related. Going forward, we expect our net assets to grow as our profitability grows is our expectation going forward.
Thank you.
Yeah.
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, 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 although we met certain members of senior management, these things are generally chaperoned experiences. 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. At the end of that sort of phase, I actually called the chief people officer to tell her, "I thought you'd done a fantastic job," just given the depth and quality of the team that I met. I'll say that's the single biggest positive surprise.
A close second 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. A third would be just experiencing the power of the products and the brands in trade. When we begin to sort of spend time with traders, owners of the business versus being, again, chaperoned. If I had to choose one, by far the most impressive surprise so far has been the quality of people.
The next question is from Juwon. Please unmute yourself and go ahead.
Good afternoon. Thank you for this very detailed presentation, congratulations on the acquisition. My question is just two simple questions. The first is on the benefits Chi previously enjoyed with related party. Prior to the acquisition, I believe they enjoy both manpower services and also discounting of some of the supplies from their supplier here. Now that it's been shifted from Coca-Cola to UAC, how do we see this pan out in terms of their working capital cycle that you mentioned that should show a reduction? Because I believe that this should increase maybe trade payables because of the benefits. I don't know if the benefits will now be replaced or if it's going to remain the same way. 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 regards Chi Limited?
On the first question, let's just call that sort of risk or downside from carving out of the Coca-Cola system. 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 standalone business, which then begins to make sense. 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 standalone 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.
We found that our work planning to prepare detailed plans to carve this thing out of Coke were not necessary. 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, two months of handover, but we spoke a couple of weeks ago and realized we hadn't spoken in three weeks because it just happened so seamlessly. I think a combination of the business being standalone 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 standalone business. I would say that six weeks in, if anything, maybe we'll have some benefits just from much, much faster decision making for the company.
In terms of exports, we believe, and are increasingly validating that there's a big opportunity. 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%. We're laser-focused, and we're gearing the organization towards delivering that. I should say, by way of pleasant surprises, I've 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. I would estimate we can get at least 10% more volumes from export, which we will do, but it doesn't come close to the work on margins in terms of ranking from priority perspective.
There are some questions in the chat box. The first is from Onome from Greenticker, 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 road to market performance. Do you feel the current distribution setup is delivering sufficient reach and share 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. From a sort of absolute basis, the expectation is that the dividend payments should go up. That's to address Onome's question. 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.
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 route to market capabilities and distribution are already top-notch.
Desmond from WSTC asks, how soon do you plan to localize the purchase of inputs?
Oluwaseun 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?" Thirdly: "Should we anticipate a year-on-year reduction or increment in the scheme share purchases
Those are many questions. I'm just trying to note them all down. In terms of localizing raw material sourcing, it's going to be a journey, and we think about this in terms. There are caps, cartons, shrink wraps, milk, sugar. 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. We plan to do this via, I would say three 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. 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 supply us to develop their businesses, such that over time, they begin to provide us inputs. 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. 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. It's more moving this company from Microsoft Dynamics to our SAP S/4HANA.
We've taken ownership of the business, and it runs, and I'm very thankful to the management team for making that process easy. We don't do group-wide procurements, 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. 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. Where the actual cash returns exceed our investment needs, returns into 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's no need to buy any more shares.
Your 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, 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, by extension, much bigger profit, same size of business, the nominal dividend should go up.
The next question is from Nabila from Access ARM Pensions. "Considering the FX exposure from imported packaging materials, could you share the expected timeline 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?
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. 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 irrelevant as regards foreign exchange sourcing, in the periods when dollars are scarce. What we found is whether you take UAC Foods, which is a very similar business that has very high degrees of domestic sourcing, buying flour, sugar, oil, or ground cereals, which has maybe 80%, 90% domestic sourcing, the prices of all of these things move with the FX. 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'll say we've lost some money because the Naira has appreciated, and we refinance all of that into Naira either this year or early in the first quarter of next year. We plan to retain zero, to, I guess, directly answer your question.
Team, we note your comments on the presentation request. The slides are currently on our website, and we'll be dropping the link on the chat box shortly. Victor, we would also be providing the recording of the call afterwards on our website. 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'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? Separately, what's the trajectory on volumes, both historically and how you see that shaping up next year, especially with the pricing overlay?
One thing that I should touch on that we haven't done, and this is just luck. It's nothing to do with our brilliance or our planning. What we are finding in FMCG in Nigeria is that the prices of goods are actually coming down. We've had one surprise. We've seen only one, I guess, one month of post-acquisition results. Because prices are coming down without doing anything very intelligent, we have already benefited from seeing margins going up. 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. 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.
There are many things that go into trying to get your optimal margin. Our philosophy is that increasing price is the last thing you do. 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 four or five years. Going forward, we feel that we are going into a much stronger consumer environment than we had historically. That should support good volume growth as the consumer has more spending power.
To ask a question, please raise your hand up 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, Cynthia. I thank everyone for the active participation and the questions. 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.