Agility Public Warehousing K S C P : Transcript of the Analysts Conference

Agility FY 2023 results webcast transcript

Arqaam Capital

And as a result, also the scope and the scale of the company expanded significantly. And this on paper sounds very natural and easy, but you have to keep in mind this was not like we are buying minority stakes in companies. This was real operations, expanding our management team, our talent capacity, our financial flexibility, our balance sheet, and our funding to grow the company. So, it was a very difficult and hard period of time.

Then in 2010 the company was significantly larger. Market cap reached more than KD 500 million, 22,000 employees, and our EBITDA went to KD 115 million by the end of 2010. The company by then was a global company, so it was impacted by what the whole world was suffering from which is the global financial crisis plus we had our legal issues with the U. S. Government, which we later on, settled and cleared. Then we refocused the company from 2011 to 2020 on being a global and commercial company. So, from 2003 to 2010 it was mainly a military business and acquisitions. Then starting 2010 we had no military business and the focus shifted to the commercial business and the platform that we have built in the previous seven years. I think back then in 2010, the perception about the company was that it will not survive without the military business and the company will have major issues and as a result, the market cap went down. It was a very difficult period with a lot of bad perception in addition to the global hardship, which every company faced and us as a global company were vulnerable to it. So, during this challenging time we had to fight a legal battle, where we genuinely believed that we have done nothing wrong, and to face a global financial crisis of that magnitude. We spent the next 10 years from 2011 to 2020 focusing on our core businesses, the Logistics, the Industrial Real Estate, turning every corner and every stone, cleaning up, resizing, refocusing the company and by the end of 2020, the market cap reached about KD 1.4 billion and our employees continue to grow to 28,000, 100 countries and EBITDA also continued to grow to KD 162 million. So, I think that was a very hard period because our dependency on the military business and the main source of cash over the previous seven years has disappeared but not only that, we were faced with a legal battle with the U. S. Government and in addition the global financial crisis affecting our global logistics business. And despite that, we have managed to prevail and grow the company and preserve the wealth of our shareholders.

And then in 2020, as we all know, the crisis of the pandemic hit everyone and we got paralyzed. Everyone at the personal level, at the company level, at the nation's level, everything stopped, and it was a shock initially, but then we realized very quickly that this could be an opportunity to monetize our logistics business. And we managed in 2021 to sell our logistics business for USD 4.2 billion to DSV in exchange for a stake in DSV. And at the same time, we also realized that the company; after selling the logistics business, which gave us the global presence, became at best a regional company and maybe a holding company with a bunch of assets and a bunch of shares. So we lost our identity, which was being a global logistics player. I think it was exactly a year after that when we acquired Menzies. And through the acquisition of Menzies, we managed to get back to being a global player, owning and operating assets, and in addition, we have this very precious asset, which is our stake in DSV, which we are very proud of having and we

Agility FY 2023 results webcast transcript

Arqaam Capital

believe the company is the best in its league and has a lot of potential. So, from the time the pandemic hit in 2020 until 2023, those four years were very tough but also very rewarding at the same time for the company and its shareholders. We managed to shuffle our portfolio of businesses by selling GIL, we got a stake in one of the best players in the same field, so we are still indirectly invested in logistics. We got at the same time our hands on Menzies, which was a publicly listed company in the UK, in a very good time when the aviation industry was at its lowest as a result of the pandemic.

And then we reshuffle our portfolio where now we have Controlled businesses, like Menzies, Tristar, and where we also have our industrial real estate. And then on the other side, we have investments. The biggest part of that investment segment is DSV. And of course, we did all of that by leveraging the company. We had to leverage because we didn't sell GIL for cash. And you can imagine and I'm sure all of you went through it, we went from this ultra-low interest rate environment to this very high interest rate in a relatively short period of time. And we were sitting on about USD 2 - 2.5 billion of debt, and as a result of the high interest rates the market started to go down, because interest rates go up, the markets go down, the value of assets go down, and hence our stake in DSV went down. We have been trying to hedge the value of this asset since we got it. But for practical reasons, we couldn't do that on time. And then, ultimately, last year, we managed to hedge our stake. 75% of our stake in DSV is now hedged, basically, we bought an insurance policy through the funded collar. And at the same time through the funded collar, we got a relatively cheap debt capacity, where we could take that relatively cheap debt and settle our existing, more expensive commercial debt and put the debt with the collar so their maturity and their currency and everything goes hand in hand. So, between the sale of GIL and the acquisition of Menzies, which was almost a year after, the hedge of the DSV share, the reorganization of our financing, all that in the last four years and then on the top, we got some legal issues in Kuwait. So, you can imagine the environment we have been operating in. However, despite all of that, we continue to see our profitability and our EBITDA and our EBIT grow. Our business is becoming more and more resilient. Our business model, and we as a company, going from a KD 9 million, 27 years ago to being a KD 257 million EBITDA by 2023, I think it's something that we stop at, at least once a year and reflect and we look forward to continuing this journey. I think it is critical for us to put that in perspective, because that telescopic view gives you a sense of how the company is being managed, not just by words, but through facts and history throughout the years. So, you can get a sense of how this company could potentially be managed in the future and the amount of value creation that we are very much as a management team focused on.

We work for the best interest of our shareholders and nothing else. And I think we have proved through our track record, over an extended period of time, that despite all the challenges and despite all the different twists and turns that we have been through, we have been able create value for our shareholders.

Agility FY 2023 results webcast transcript

Arqaam Capital

So, from that perspective, this is a slide that shows you the EBITDA and how it has evolved over the years. You can see the KD 9 million in 1997 going to KD 257 million, which is the orange bar. And what we have done here, hypothetically, only for the purpose of this exercise, because DSV investment, we own almost 9% today, doesn't get reflected anywhere in our income statement. Because of the accounting treatment, it only gets reflected into our equity and any change in the stock price goes there, but effectively being strategic investor in DSV, with 9% ownership of that business, that 9% today translates into around KD 90 million of EBITDA, which is our hypothetical pro-rata stake in DSV. So, if our ownership is not 9%, we could account for it differently. But since it's only 9%, we can only take the the change in the stock price through the P&L or through the equity and we opted for the equity treatment. So, this is just to show you that from a P&L perspective, you as a shareholder today own, in DSV, KD 90 million worth of annual profitability. And when you add that to the KD 257 million, our EBITDA today is about KD 347 million. And again, this is a strategic exercise, it's not an accounting exercise or we're not trying to mislead you to think that our profitability is higher, but this is just to give you a sense of the magnitude of the underlying profitability of the investment sector as well as the controlled businesses.

So, you can see from this slide that DSV alone today, our stake in DSV is almost 10 times, the EBITDA in 1997 when the company was privatized. So, when the company was privatized in 1997, the shareholders were getting KD 9 million. Today, the shareholders have a claim on KD 90 million of DSV EBITDA, which is almost alone 10 times of the whole profitability in 1997, and then the KD 257 million we will talk about in in the next few slides.

So now I will move from the telescopic view to maybe microscopic view. So, I move to the performance of 2023, and I think this is just a list of the different events that have been announced. And, you know, the major event here was the multi-year funded equity collar. As I explained, by doing this we actually hedged, so we got protection for the DSV stake, and also, we provided stable and cheaper liquidity to fund our operating businesses. There is a specific section in our financial statement about the legal claims in Kuwait and outside Kuwait, it's quite comprehensive and you can read that on your own. It has all the details and updates from the lawyers, describing exactly what is happening, all the steps, what actions have been taken, etc. So, if you need to know more about that, you will find a very comprehensive note in the financial statement.

In terms of the key numbers for the quarter, revenues were flat, net revenues were up 15%, EBITDA was up 22%, and then net profit was down around 2%. You have to keep in mind that the increase in financial costs has been quite significant over the past year or year and a half, and I think going forward, it should level down as a result of hopefully a declining interest rate environment, but also the cheaper debt that we got through the funded collar. I want to remind you that the funded collar took place in two tranches. One was in April, and one was in July. So the impact of that funded collar, lower interest rate should be clear in the next few quarters.

Agility FY 2023 results webcast transcript

Arqaam Capital

In terms of the full year, I think we had an impressive year and, the year was an extremely positive year for our operating businesses. You can see revenues up 57% and that is a function of the full year effect of the acquisitions, the consolidation of Menzies and HG Storage, but also due to the recovery in the business, particularly in the aviation space, I think we are very close to the 2019 numbers in terms of aviation recovery, and we are very pleased and very happy with the performance of Menzies so far as well as Tristar, and definitely the logistics parks, predominantly in Saudi today. Net revenue is up 73%, EBITDA is 43%, and net profit is as you know, at a slower pace of 23%. And that's again a function of interest rate increase.

This is a slide that we started putting in our presentation since we did the DSV and the Menzies deal to show how much the contribution to our P&L from the two segments, and you can see that the Controlled business has an even much higher performance because of the negative impact of the Investment on the overall company.

Again, this is our balance sheet. We continue to enjoy a strong balance sheet, total assets of around KD 3.8 billion, and the equity attributable to the shareholder is about KD 1.8 billion. If you look at the right side you can see how much of our assets is in the controlled segment and how much is the Investment and you can see the 60:40 split and that also signify the importance of the investment segment in our financials, which due to the accounting treatment doesn't get reflected into the P&L. So, if you look at the company going forward, and you want to assign a value to the company, you cannot ignore any more the Investment side, which is predominantly the DSV stake. The Controlled portion is about 60% of our balance sheet, and that has been growing over the last couple of years. You can also see that our net debt to EBITDA has improved, and that improvement is more due to the increase in EBITDA, because you can see the net debt has increased by about KD 86 million but the net debt to EBITDA metric went down from 4.4x to 3.5x as a result of the increased EBITDA.

I think this is an important slide because it shows the debt and I know that our debt optically and genuinely is at a high level, but how we restructured our debt today, we feel very comfortable about it. I wasn't comfortable a year and a half ago or almost a year ago at the beginning of 2023 because, as I said, interest rate was going up so almost every 1% increase in interest rate translates into roughly USD 30 million of additional interest. And we needed cash to transform the company over the past several years, so we had to borrow. We always believed DSV is a very good asset to own for the medium and long term, and hence we didn't want to sell any stake, and you can see, we got 8% initially when we did the deal with DSV, today that 8% became 9% in DSV because DSV has been buying its own shares and we have not been participating in that. So, overall, a year ago, or a year and a half ago, I was quite nervous because of the level of debt, the higher interest rate, as I mentioned each percent roughly translates into USD 30 million and at the same time, because of the interest rate environment, the market has been extremely volatile. So, the value of the shares in DSV has been going through a lot of volatility up and down. That volatility is reflected in our equity and at that period we are unhedged.

Agility FY 2023 results webcast transcript

Arqaam Capital

So, I think this year, given that we have been able to hedge 75% of our stake in DSV, so we have an insurance policy on the downside. And as a result, we got the debt on the back of that. So now the debt is linked to the shares and it's a medium-term maturity debt, as you can see here, 38% will mature in 2026 and then 51% in 2027, then 11% in 2029. That gives us flexibility, because we can always extend the hedge if we want to, since it's a bilateral with the banks. And as a result, the debt can also automatically be extended. So, it is much more flexible and much safer to structure it this way. And at the same time, we locked the interest rate which was relatively lower than what we were paying previously. So that gave us peace of mind in terms of the P&L impact. Note, we had to pay that up front, as a prepaid interest. And as a result, you will see that in the cash flow. But on the P&L we amortize it, so that's more of a cash flow issue rather than the P&L issue. But anyways, lower interest rate and more alignment of debt to asset, but more importantly, we got most of our debt in Euro because the underlying asset, which is DSV, is Euro based. So, we hedged also 87% of our debt, got it linked to the Euro, and in terms of maturity, we have the flexibility now, as and when we need to extend our hedge, our funded collar, we can also extend the debt. So, this slide, the importance of it is that we are in a much better and much more stable place today than we were a year ago or two years ago.

This is the cash flow. You can see that our free cash flow has been positive this year. As communicated before, since 2015 we have embarked on investing in the business and as a result you realize that our debt level has been increasing over the years since 2015. I think we are done for now for any major investment. The focus now is on managing the three key businesses that we have within the Controlled businesses organically and inorganically. And I think each business has its own capacity to continue to grow. And I feel very optimistic about the future of these businesses. They are in a very strong sectors with very robust cash flow generating ability, and I think they will not put major burden on the corporate and our ability to maybe pay dividends in the future. And then if you look at the CapEx and the investment, you realize again 2023 has 58% Controlled and 42% Investments. Again we are not investing in buying shares in DSV or any additional shares, but this is mainly the funding to Reem Mall because Reem Mall today is funded through a convertible debt at Agility level, and hence, for now, it is classified as an investment, and hence, you can see the 42% of the capex for 2023 is mainly the investment in Reem Mall or the funding that went to Reem Mall from our side.

This is just a snapshot that shows the significant year-over-year performance in the aviation on the top line and the EBITDA line also on the Fuel Logistics, which is mainly Tristar and then all the other controlled businesses.

Again, in Aviation there has been a significant recovery. We are almost back to the pre- COVID levels. I think the company is much more fit today and I think we feel very optimistic about the future of that investment that we have made in Menzies. And I think it has a lot of potential going forward.

Agility FY 2023 results webcast transcript

Arqaam Capital

Same with Tristar. We bought this company from Eugene in 2003. We bought 80%, today we own 65% and it's just amazing to see the amount of progress and the amount of value creation that has taken place over the past 21 years. And then the other controlled businesses, that's the ALP, that's GCS, and UPAC. Still very strong businesses, revenue is up 10% and EBITDA is almost flat vs. last year.

I think we need to talk about dividends. If you look at the Agility's history over the past 20+ years, we have paid dividends almost every single year except in 2022. And I think it's worth maybe repeating what we tried to explain last year about not paying dividends because I think there has been a lot of misperceptions, a lot of speculation about the reason why we did not pay dividends last year. But if you think about what I just explained, the situation last year was higher inflation and as a result higher interest rate, everybody last year expected recession. And for us with the amount of debt we have back then at the group level, this meant significant amount of costs, cash and expense to the group P&L and then on the top we got one of our major assets, which is DSV,the stock price of such asset has been declining along with the whole market because when interest rate goes up, asset values go down, and DSV is no exception. So, the DSV stock price has been going down significantly. And then we were hit by legal dispute in Kuwait, which we didn't know how this macro and the microenvironment in Kuwait would evolve. So it was only prudent not to pay dividends last year, because when you are dealing with such uncertainties, I think you have to be very prudent and think about the best interest of the company. In the Board, which is only natural, some Board members were for distributing dividends and there was a debate, but I think the right decision was made from the Board last year that it is prudent not to pay any dividends to the shareholders for 2022. So, we were not like penalizing or trying to punish shareholder, because end of the day, the company belongs to the shareholders, the dividends belong to the shareholders. And if the dividends are retained in the company, it's retained for the benefit of the shareholders, not for the benefit of anyone else. So, it was a bit puzzling to read some comments about the management or the Board trying to punish the shareholders, because I think that's very unreasonable, to be honest and frank, the decision was only out of prudence and it was the right step to take and not distribute, particularly, cash dividends. So, the company was in a much more resilient place to be able to thrive and continue to face the challenges that we were facing in a more resilient way. So, this year, as I explained, no analyst today is expecting a recession, which was not the case a year ago, inflation expectation is lower and hence interest rate has been stable and expected to go down. And as a result, asset prices have gone up, including DSV. And when that happens, we were ready to transact with the funded collar. So, we took advantage of the surge in the stock price of DSV and we locked our insurance policy, funded collar at a very good rate. And as a result, we were able to get a cheaper loan to repay our relatively expensive commercial debt. So, we are definitely today in a much better position compared to last year. And as a result, the Board decided to distribute cash dividends and as we have announced there is an interim dividends distribution, with the record date of

Agility FY 2023 results webcast transcript

Arqaam Capital

18th of April and then for the full year financials, there is a cash dividends of additional 10 fills. So, in total, there will be around 20 fills in total.

And then, I think we can get into the in-kind dividends, which we fully understand that this is probably the first time it happens and it's not common. In essence, we are giving the shareholders part of their company in the form of an in-kind dividend and that part of the company is materially the international operation that has been put under Agility Global PLC, and that company is pursuing listing on ADX. Now, I know there has been lots of questions about putting a tag price to this company, and unfortunately, no one would be able to answer that question until the listing date, where the supply and demand dynamics in ADX will determine how much this company is worth. So, our view as management is that today this in-kind dividend in itself is technically not adding value. We are not giving anything that the shareholders do not own today. It is not a transaction where we have acquired something or sold something. It is a distribution of part of the company that the shareholders already have. So, the question then becomes, why would you do this? If you notice in the first slide with the market cap and the value creation, we believe the value creation for the shareholders is coming from two parts. Part one is the price appreciation of the stock and the market cap increase, not just the per share price, and part two the cash dividends. If you look historically, I think 20% to 25% of the value creation that we have generated - which is about 20 times the value of the company at privatization - is coming from cash. So, we distributed cash dividends and then 75% to 80% is coming from market cap appreciation. But if you notice in the last year, because of the legal situation, and the perception that this is becoming a holding company, the market was unable to assign clear value to each asset separately and as a result there was a discount to holding companies. We believe the best way to crystallize and unlock that value is by showing how much this piece of the business is worth and hence any listing of such an asset will over time, because of the supply and demand, allow the market to be able to assign a value. So, once that value is crystallized, the owners of the parent can easily figure out what is the sum of the parts of their holding and how much Agility is worth. It's a bit technical. I know many of you understand that, but in essence, this step is meant to crystallize the value of the underlying assets, the international assets, that we have. And by doing so, we hope that the sum of the parts post listing far exceeds the sum of the parts prelisting. That's the hope, and that, we believe, is going to be the case. Maybe not initially because there will be maybe supply and demand imbalances. There will be some volatility initially, but ultimately, the market will, as Buffett says, "it's a weighing machine", and we believe the market will weigh that asset and assign the true value of such asset that today is definitely discounted, being part of what is perceived as a holding company. So that's the intent and that's the thinking process behind that.

The other key issue is that with this in-kind distribution, Agility Public Warehousing Company KSCP, the parent company will have a controlling stake of 51% of Agility Global PLC and as a result of that Agility Global PLC numbers will be consolidated with Agility Public Warehousing Company. So yes, the equity of Agility Public Warehousing Company will be lower. The carrying value of the 49% of Agility Global is KD 800 million and that is

Agility FY 2023 results webcast transcript

Arqaam Capital

definitely going to be classified from equity to minority. But mind you, a very important point, the 49% minority is going to the existing shareholders. There is no external capital, there is no capital increase, there is no primary or secondary sale of the shares there is no valuation whatsoever. Every single shareholder in Agility parent today will get the same exact treatment of the share of Agility Global without any additional third-party money coming in. Which means, yes, the equity will go down by KD 800 million, which is the estimated carrying value today, this number will be 100% clear at the time of distribution. So, this amount is going from equity to minority, but who's the minority here? The minority is all the shareholders of Agility. And I think that's the best way for us to make sure that there is equity and fairness and avoid any misperception of valuation of Agility Global. So, every existing shareholder is getting the same treatment. We are going to work with investment banks, to make sure the value of Agility Global PLC is clear. We will engage in roadshows and try to make it clear to the market, so analysts understand the value of Agility Global PLC. So, when the listing happens, there should be a clear value crystallization for our shareholders. Agility Global PLC is also expected to have its own dividend policy, and it is likely that Agility Global PLC will distribute dividends in 2024 but that dividends is subject to the approval of its Board and the regulatory approvals. The management is doing its best to make sure that this asset, when it gets listed, gets assigned its fair value, which should be reflected on Agility's KSCP shareholders.

Maybe we did not mention that in our announcement, but we are working with several international banks on this project; to name some such as Morgan Stanley, Citi and FAB are involved. I think we have the best advice that we can get for such a transaction. So, rest assured that we are doing everything possible to make this a success. There might be some volatility initially because its predominantly Kuwaiti shareholders trying to trade on ADX in Abu Dhabi. We have appointed Markaz to help facilitate the opening of accounts and NINs and I think there could be some imbalances between supply and demand and that supply and demand, hopefully over time, will balance out and the real value of the company, through the education and through raising the awareness of Agility Global in ADX and beyond, gets the right traction, which hopefully will get reflected on Agility KSCP shareholders.

So, this presentation is available, so you can read through the different points. In terms of timing the board's approval was March 27th. The record date is April 18th and the last trading date is April 15th and then we expect the listing and the distribution of shares to take place on May 2nd, so these are the key dates, concerning the in kind dividends. I think with that, I can conclude my presentation. This was a longer call than our usual call, but I will try to address all the questions and then conclude. Also, the IR team and myself will be ready to take any calls to answer any of your questions, if need be, over the next several weeks.

Agility FY 2023 results webcast transcript

Arqaam Capital