Mezzan Holding Company K.S.C.P. (MEZZAN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to this Mezzan Holding call to discuss the company's earnings for the year 2019, which were announced 24 hours ago. Today is Thursday, the 9th of April, and this call is held live from Kuwait and Dubai. A recording of the call will be available on the same link within about 2 hours. My name is Fawaz Al-Sirri. I'm the moderator on today's call. And I'm joined as well with today's speakers, Mr. Garrett Walsh, the group's CEO; and Mr. Fares Hammami, the group's CFO. A very warm welcome to everyone, and we hope that you and your colleagues and your families are safe and complying with the directives of your local health authorities. Ladies and gentlemen, I will soon hand over the mic to Garry to pick up the call, but before I do, allow me to take you through the format. For the next 10 to 15 minutes, the speakers will make their statements, after which we will have a Q&A session. [Operator Instructions] I would also like to mention that given the current circumstances, we are currently practicing social distancing and as such, working remotely from multiple locations which may take us longer to address the questions. Also some of the statements that might be made today may be forward-looking. Such statements are based on the company's current expectations, predictions and estimates. There are no guarantees of future performance or achievements or results. Mr. Walsh, please start.

Good afternoon, everyone, and thank you, Fawaz, and thank you all for joining us, and we welcome the opportunity to share with you our results for 2019. I would like to start the call, however, by stating that these are quite difficult times for all of us. And we at Mezzan and all of its -- all of our employees from our frontline team to our support teams are doing whatever we can to continue putting food and beverages, medicine and other health care supplies on the shelves, and have taken the reasonable and required measures to ensure the safety of our staff. Particular thanks goes to our catering teams in Kuwait as they serve those individuals in quarantine. I would also like to extend a sincere thanking message to each member of the Mezzan family, who, for the past few weeks, particularly doubled their efforts to make sure the communities we serve in the reach are able to find our portfolio at all times. Both the Board and I are truly grateful. Today, I will take you through a short presentation discussing both the tailwinds we enjoyed and the headwinds we have faced during the last year. I will then go through financial highlights, after which I will hand over to Fares, who will take you through the detail of the financial performance. Lastly, as Fawaz said, then we will be opening the floor for questions. From a tailwind perspective, I'm glad to say that 2019 saw the start of the improvement in our operational performance. This was driven by both the inorganic as well as organic initiatives we took in the last few years. We witnessed top line growth in most business units. However, I would like to highlight strong performance in the Food Manufacturing and Distribution, Food Services unit as well as the non-food FMCG & Healthcare unit. Each of these units cores grew by healthy rates in the year. We have also seen revenue growth in most key markets, albeit at varying rates, and Fares will take you through those shortly. Our UAE operations continued to support our performance and financial results throughout this year, which started earlier in 2019. We saw a pickup in energy drink sales and are witnessing a ramp-up of our production lines, which add both top line and profitability to our business in the UAE. Revenue in Qatar and KSA has witnessed revenue growth and has also been supported by their utilization of relatively new lines of production that went into force in 2018 where 2019 was the first full year of operation. 2019 also saw the beginning of recovery in the profitability of our Catering segment after a few years of losses despite the decline in revenue. We expect to see this continue further in 2020. Furthermore, we completed a couple of key strategic growth initiatives this year, where we have expanded operations inorganically. Firstly, we acquired a majority stake in KSPICO, the only pharmaceuticals manufacturer in Kuwait, and its consolidation was effective on 6th August. Secondly, we are also into distribution joint venture to distribute Medtronics and Covidien products in Kuwait starting in July. These have added to our scale and profitability, and we expect the contribution to continue further going forward. We are also growing our presence in KSA, but expanding our fleet and warehousing capacities, which are strategic goals in Mezzan, albeit painful from a profitability perspective, but these are long-term investments. From a headwind perspective, the cost of expansion of our in-house distribution capabilities in Saudi Arabia, whether one-off expenses or one-off listing fees, continued to add pressure to our financial results. That being said, we still believe that the Saudi market is a key market for Mezzan and is a driver of future growth. Throughout 2019, the bottled water market in Qatar remained challenged where the intensity of competition persisted. Our new lines of snacks are doing very well and assist in subsidizing the impact witnessed on the water market. Finance costs increased substantially as our borrowing increased to fund the growth in balance sheet side, driven by the acquisition of KSPICO and the other new businesses. This will be addressed aggressively in 2020. Finally, we also recorded noncash and one-off impairment losses as a result of impairment of goodwill as well as reduction in value of an intangible asset resulting from implementation of IFRS 16 and the ensuing reclassification of accounting treatment of one property which weighed on net profit. Whilst these are noncost -- noncash in nature, we believe it appropriate to continue with our conservative approach to our asset valuation. I would like to mention the Board of Directors has recommended a cash dividend of KWD 0.015 per share for 2019. This is subject to the approval of the General Assembly. As for financial performance, Mezzan recorded improved operation results in 2019 as evidenced by enhancement in key operational metrics, including revenue, gross profit and earnings before interest, tax, depreciation and amortization. However, we reported a drop in net income, driven by noncash one-off losses, impairment of intangible assets of KWD 2.4 million, which included a KWD 1.2 million goodwill impairment for one subsidiary in KSA as well as a KWD 1.2 million impairment of other intangible assets as a result of an accounting standards reclassification of a real estate property through the implementation of IFRS 16. If we were to exclude these noncash losses, our net income to the shareholders of the parent company would in fact be well up compared to last year. In terms of financial highlights and headline numbers for the 12 months ended 31st December 2019, Mezzan's revenue reached KWD 222.5 million, up from KWD 207.5 million in the previous comparable period for a growth of 7.2%. Gross profit expanded to KWD 48.7 million compared to KWD 44 million in the comparable period for an increase of 10.7%. While EBITDA reached KWD 18.5 million, up from KWD 15.6 million in the previous year, for an increase of 18.5%. This is important in light of the increased production capacities and efficiency enhancing initiatives we completed recently. Finally, Mezzan's net profit to shareholders of the parent company reached KWD 5.6 million during 2019 compared to KWD 7 million during the comparable period of the previous year. The drop in the profitability is driven by the noncash one-off impairments mentioned previously. At this point, I will hand over to Fares to take you through the financials in more detail.

Thank you, Fawaz. Thank you, Garry. And as Fawaz mentioned earlier, we're doing this over multiple areas and as such, we might face some delays. I apologize for that. Moving on to the financial review part of the presentation, I would like to remind investors that effective on the 1st of January 2019, new IFRS 16 standard for operating leases became effective. The operating leases have been capitalized onto the balance sheet with an asset and liability value being the time value discounted for rent expenses. As such, the rent expense of operating leases have been reclassified into depreciation and interest expense by the same amount and as such, net income was not materially impacted. The reported numbers of 2019 reflect these accounting changes. In the 12-month period December 31, 2019, operating leases were capitalized onto the balance sheet to the tune of KWD 3.2 million. Rent expense was reduced to the tune of KWD 1.36 million and interest expense of KWD 0.13 million. In addition to above, and as Gary had mentioned earlier, the adoption of IFRS 16 in 2019 and the ensuing implementation of IAS 38 as such, triggering the reclassification of one property into an intangible asset, which in turn triggered an impairment of KWD 1.2 million as a result in the drop of the value of that particular asset. That being said, it is key to note that such losses are noncash. As for -- moving on to the next slide. As for the revenue contribution of the business lines of Mezzan Group, the Food group accounted for 72.1% of the total group revenue in 2019 for a growth of 3.4% compared to 2018 while the revenue of the Non-Food group accounted for the balance of 27.9% of the total group revenues for a growth of 18.5%. Zooming on in the food group itself, the Food Manufacturing and Distribution contributed to 48% of the revenue in 2019, registering a strong 5.8% growth compared to previous comparable periods, which was driven by strong performance in Kuwait, UAE and Saudi from a top line perspective. Catering business contributed to 16% of revenue in 2019, which was a decline of 6%. Although this did not impair profitability, you will see, to the contrary, the Catering businesses witnessed the growth in profitability during last year. Finally, revenue from Food Services segment within the Food group increased by 11% -- or 10.8% in 2019 and contributed to 7.8% to 2019 revenues. In our Non-Food group, FMCG & Healthcare had a very solid performance in the period ended December 31, 2019. And the revenue for the segment now accounts for 25.6% of Mezzan's 2019 revenue for a growth rate of 21.9% compared to comparable period in 2018 while the revenue of Industrial group slightly declined by 6.9% and contributed to 2.3% last year. It is key to note here that the growth in the FMCG & Healthcare segment was primarily driven by the new acquisition of KSPICO as well as Medtronics and Covidien brands, which we started distributing -- both activities which happened in Q3 last year. Moving on to the next slide, which is analyzing the contribution and growth of top line by country. Geographically, Kuwait contributed to 69.4% of Mezzan's top line in 2019, which was up by 7% or 6.9%, resulting from strong performance of Food and Non-Food alike. Obviously, the Non-Food was also driven by the acquisitions earlier mentioned. Revenue from our operations in the UAE, as Garry had already mentioned, increased by around 8.4% in 2019 compared to 2018. The revenue was driven by the measures we took over the last year on both the Catering and Manufactured items alike. The revenue in the Qatar grew by 5% in 2019 compared to 2018 and now contributed 10% of Mezzan's top line. Saudi Arabia accounts for 2.3% -- sorry, 2.0% of Mezzan's revenue in 2019 for a growth of 13.5% compared to 2018. The increase resulted from securing new stock into Saudi Arabia through the added chips and snack capacities that are now online in the Emirates. In Jordan, sales were slightly down by 3.3%, and that market contributed to 2.5% of Mezzan's revenue. Revenue from our operations in Afghanistan were up by 23.1% during the year, and that market accounts for 3% of Mezzan's total operations while operations in Iraq contributed to 0.9% and were up slightly. Moving on to the profit and loss of Mezzan in 2019. Revenue reached KWD 222.5 million for an increase of 7% compared to 2018. As explained before, this was driven by top line growth in almost all key markets. Gross profit in KDs reached KWD 48.7 million in 2019 compared to KWD 44 million in the previous period, which was a meaningful growth. And margins -- gross profit margins increased by 110 basis points and reached 21.9% at a group level. SG&A have increased by 8.4% in the 12-month period ending December 31, 2019. This was driven primarily by a flattening of the general and administrative expenses given the economies of scale, but sales and distribution went up to reflect the growth in sales of the acquisitions that we've acquired. From an EBITDA perspective, as Garry had mentioned, we've reached KWD 18.5 million, up from KWD 15.2 million in the previous year for an increase of 18.5%. This is quite important as a metric for us because, obviously, we have invested meaningfully, both on inorganic growth through acquisitions as well as CapEx over the last few years. Financing costs and other expenses increased to KWD 6 million compared to KWD 3.4 million in the previous period, which include also the losses that we have spoken about earlier. The financing costs increased by around KWD 1 million compared to 2018, and that reflects the growth in the borrowing given the acquisitions, both from an investment perspective and from an investment and working capital perspective. In summary, net profit had reached KWD 6.3 million in the 12 months period ending December 31, down by 5% from the comparable period. This includes the one-off noncash expenses or losses that we've mentioned earlier with a total of KWD 2.4 million. The drop in net income were driven by these noncash one-off losses, which were 2 main ones, impairment of intangible assets that have a combined value of KWD 2.4 million, the first of which was a KWD 1.2 million goodwill impairment for our investment in one of our subsidiaries in Saudi Arabia, and the other was a noncash loss of an impairment of another intangible asset as a result of an accounting standard change and the reclassification of a real estate property into an intangible asset, which then in turn triggered a loss of KWD 1.2 million, given the drop in valuation. If you were to exclude these noncash losses, our net income would have been in fact up by KWD 2.4 million compared to the previous year. Net profit attributed to equity holders of the parent company reached KWD 5.6 million in 2019 compared to KWD 7 million in the comparable period of 2018. These were restated for a decrease of 19%. Again, 2019 net profit shareholders -- net profit to the shareholders of parent company includes these noncash one-off losses of KWD 2.4 million mentioned earlier. If you were to exclude these noncash losses, our net income to the shareholders in the parent company would have also been up by around KWD 2.4 million than the amount that you saw in the P&L. Moving on from a cash flow perspective. Our operating cash flow before working capital investments were KWD 22.3 million in 2019, which were up by KWD 5.3 million from the previous period. In the year 2019, we invested KWD 11.4 million in working capital compared to an investment of only KWD 6.5 million in the previous period. The investment in working capital was primarily driven by the acquisitions of the new businesses as well as the new agencies. This is also building for the future. Cash flow from operating activities have reached KWD 10.9 million in the year 2019 compared to KWD 10.5 million in the previous year. Cash flows used in investment activities reached an investment of KWD 28.8 million, given the acquisition again of KSPICO and additional stake in the subsidiary in Saudi Arabia as well as maintenance capital expenditures. This compares to KWD 7.1 million in the previous period, where we did not make these strategic acquisitions and just made some capital expenditure. The cash flow before financing was an investment of KWD 17.9 million in 2019 compared to a positive of KWD 3.5 million in the previous period, driven again by the expansion and building for the future. Finally, our net debt increased by KWD 28.9 million in 2019 compared to an increase of KWD 10.8 million in the comparable period of 2018, again, funding the future growth. Moving on to the balance sheet. It is key to remember that 2019 witnessed the completion of several inorganic initiatives, including the acquisition of 66.994% stake, which is a majority of stake in KSPICO as well as the entrance into the JV in Medtronics and Covidien to distribute these products or brands in Kuwait. These were both financed through borrowings. This led to an increase in the balance sheet size of Mezzan, assets reached KWD 260 million as of December 31, 2019. And given the bank debt funding, it increased our net debt to KWD 74.4 million and net debt to capitalization ratio of 41.4% while equity to shareholders of the parent company reached KWD 105.6 million. I will now move the discussion today to Garry to give you the forecast for 2020. Garry, the floor is yours.

Thank you, Fares. Obviously, based on the acquisition we've made as well as the performance of the underlying business, we would expect to see our top line grow by double digits this year. And off the back of the fixed cost base, we would see that driving high double-digit growth in EBITDA and high double-digit growth in the net profit. Obviously, we are not anticipating any more accounting treatment adjustments within this year. CapEx will be reduced as we push ourselves towards addressing the debt very quickly. And we have seen nothing in the first quarter of the year which would disabuse us off the numbers on the screen. Fawaz?

Thank you, Garry. Thank you, Fares. We will now be taking in the audience's questions. Several of you have already sent them through. So we'll take them one by one. Give us a minute.

We're going to start off where they -- and then we have a question from Sultan [ Ashalan ]. Part of that question was already just answered. Sultan was asking about guidance for 2020. The other part of this question is, and I'm going to read it to you now, it says what is the impact of COVID-19 on each segment so far from what you have seen. Garry?

So not -- good question, Sultan. And effectively, from our perspective, obviously, we operate in a number of different jurisdictions. And the reality is that each jurisdiction has responded at a different time and in a different way to this emerging threat. We have areas of our business such as the services, where it has had little to no impact. As those already operate under a high level of security and a high level of lockdown. Within our core businesses, I think it would be fair to say that we've seen a move away from the more luxury items to more commodity-based items. And so if I look at our FMCG business, for example, we would see things like antiseptic liquids, sanitizers, et cetera, toilet rolls accelerating in sales very rapidly. But we would also see things like luxury shampoos, makeup, et cetera, reducing. And so overall, we believe that it will have a relatively neutral effect on the business and in Q1 and Q2, relatively neutral to positive. However, our focus is on Q3 and Q4 at the minute of making sure that our supply chain remains robust, given all of the issues that we currently face.

Thank you. Next question is from Jagadishwar Pasunoori. The question was, why was net income negative by KWD 2.1 million in Manufacturing, Distribution and Food segment in the fourth quarter? And how much would it have been without higher expenses from KSA? Fares, do you want to take that one?

Sure, Fawaz. Well, the fourth quarter competitively on the Food and Manufacturing, Distribution segment had dropped by KWD 2.1 million, correct. But that has a couple of points we need to recall. First of all, Garry mentioned that we had sold in the previous year -- so in 2018 we had sold a land that was clubbed within the Food Manufacturing and Distribution, that was a gain of KWD 1 million. So there was a one-off KWD 1 million gain on the previous period, which now accounts for this part of the delta. The other part of the delta is, as we said, it's not only Saudi. Obviously, we've mentioned that there's been some difficulty in operating the Water Line in Qatar. And we've also taken one-off impairment losses or trading losses in one of our subsidiaries in Kuwait. And the last bit was an accounting IAS 19 sort of end of service benefit one-off fit as well by around KWD 200,000. So we are talking about multiple regions and it's not only just Saudi. On the Saudi bit, as you know, unfortunately, you don't mention performance per country for profitability. And unfortunately, I'm not at liberty to share that.

Thank you, Fares. We have a follow-up question from Jagadishwar. And he's asking, will you be able to reach 2017 net income level in 2020? Fares?

We -- obviously, we never crystal ball a certain figure. We don't commit to a certain number. So if you're comparing it to a specific number in 2017, we can't just say that. However, I would use the guidance that Garry had mentioned. Obviously, we don't anticipate the one-off impairments that we took this year to happen again. And obviously, we do anticipate some growth given the annualization of the acquisitions that we've completed in the FMCG segment. And obviously, the continuation of the development of the profitability in some of the segments that we've recently invested in, including the reversal of losses that we started to witness in 2019 in the Catering business. So unfortunately, I can't tell you whether we reach a certain figure, but we do anticipate a very high double-digit growth in profitability compared to 2019.

Next we have question from [ Khalid Uhehad ]. Part of that -- part of [ Khalid's ] question has already been answered, but the other part is also connected to the COVID-19 crisis. [ Khalid ] is asking, what are the effects of COVID-19 to the company? Can you explain both the positive and the negative side, please? Garry?

[ Khalid, ] I can honestly tell you that the answer to that question changes every single day. If you look at our business in Qatar, for example, in the middle of March, our facility was put under quarantine as part of an initiative to quarantine the entire industrial area within Qatar. And there's a human cost to that. Obviously, we have 300 people tapped on the site. And it was very difficult to get trucks out to actually service the market with essential supplies, i.e., water and [indiscernible]. And so you could put that down as a negative. We had -- within our Catering business in Qatar, we have 350 people quarantined merely because they live next door to a building where there was COVID cases. Fortunately, over the last 2 weeks, those scenarios have unwound. And we thank God for that. However, just 2 days ago, Kuwait put 2 areas of the country on lockdown where we have a number of our staff. And so the answer honestly changes on a day-by-day basis. What I can tell you is that so far, for every negative we found a positive. So if you look at our Catering business, the guys have done a great job starting to supply quarantine meals to people under official quarantine in Kuwait. I would certainly congratulate the Kuwait authorities in the way they've approached the whole matter, where they've made sure that the resources were lined up to deal with their decisions as they made those decisions. And that's been a benefit to our Catering business slightly towards the end of March and more so in April, obviously, as the numbers under quarantine increase dramatically. So on our core food business, we've seen things like rice, tuna really sell rapidly. I have some skepticism as to whether those are long-term gains or whether they will reverse in the second half of the year. But as I said, when we were giving the guidance on balance, we believe that our guidance for the year is robust even in the COVID scenario. I hope that gives you the answer you need.

Next question is from Meera Reddy. She has 1,2, 3 questions in one. So I'm going to read them -- all 3 questions, and then I'm going to hand over to Fares to track on them one by one. Her first question is you incurred an impairment expense of KWD 1.15 million for the recent KSPICO acquisition. If you are incurring an acquired asset soon after acquisition, doesn't this mean you overpaid for the asset? What are the problems you are facing with this asset? And what is the outlook for 2020 for this asset in terms of profit generation and in terms of further impairments? The second question is how long do you anticipate marketing and promotional activities/listing fees within KSA to go on for? And her third question is, can you give us more details on the KWD 20 million increase in receivables in 2019? And what are you doing to address the issue? Over to you, Fares. I hope you got it all down.

Yes. This all -- doing it remotely makes it a bit more difficult. But let me try to see. I think if I heard you well, you said that the first question regarding KSPICO that we took a hit of KWD 1.15 million impairment expense, that's not -- the 2 impairment losses that we incurred in 2019 were: one, an accounting reclassification triggered valuation drop of property in Kuwait. So we had it previously recorded as a property. And given the implementation of IFRS 16 in 2019, we had to reclassify that asset into an intangible asset. And as you guys are aware, intangible assets are not amortized but rather have an impairment testing every year. When we did the impairment test this year for the first time, there was a drop in the valuation. And as such, that asset took a hit. And the other part was KWD 1.2 million impairment of goodwill. Again, we do goodwill testing every year as part of our closing process. And there was one investment in Saudi Arabia that we had a goodwill for, and we had to take an impairment of KWD 1.2 million. Just to erase any confusion, neither of these one-off impairments relate to KSPICO at all. If I recall the second question, Fawaz, I think you said, how much do we expect the marketing and promotional activities and the one-off losses starting to persist? Well, obviously, we are still building our distribution channel in Saudi Arabia. If you recall the story, we bought the asset a few years back. However, for obvious reasons, we couldn't supply as much. We started supplying the product in 2019, which meant that we started investing in the distribution -- sales and distribution and the promotional activities in 2019. We can't cover a Saudi market as big as Saudi in 1 year. So this is a timing proposition. However, we do anticipate if the plans that we're doing do progress and proceed, we do anticipate that the losses in Saudi will subside substantially this year. And the last bit I guided was an increase in receivables. Well, the increase in receivables and increase in inventory that's happened in Mezzan is obviously driven by the acquisition of businesses. We acquired KSPICO in 2019. And obviously, KSPICO has exposure to certain ministries which help certain industries. And as we've always mentioned, that ministries do have a longer collection cycle. That doesn't mean that we have credit -- we have a credit risk, but rather may be a timing issue, which is always priced in our pricing. And obviously, we also became the agents for Medtronic and Covidien in Kuwait. And we've expanded the business going forward in 2019 for the future by investing in working capital. What are we doing to release the trade receivables? Obviously, we are really now focusing more and pursuing aggressive plans to collect faster from some governmental accounts as well as other customers. Back to you, Fawaz.

The next question is going to be for Gary. The question is from [ Rajat Bakshi ]. [ Rajat ] is asking, can we get more color on the new pharma acquisition? How does this fit into the overall portfolio? And how has the top line been or -- and the bottom line for this asset, especially over the last 12 months? And how should we think about growing this business going forward? Garry?

[ Rajat ] good questions. I'll answer them as best I can. Feel free to come back up with follow-ons, if I miss anything. Obviously, from our perspective, we had a medicine business within Kuwait, but it was #6 in the market. We're very clear that our ambition for most of our businesses is to be either #1 or #2 in the market or to exit. And when these assets came on sale or up for sale or where the majority stake in it came up for sale, we looked at it and liked for several reasons. One, we have a factory that is very well invested but underutilized, but still profitable, which is important, and we have a lot of land which is open for development. And obviously, in Kuwait, land is at a significant premium, given the restricted geography of the country. And thirdly, we felt that the new management team we have brought for the Medicine division, anyway, would be able to better maximize that business. We have several routes forward for us. Obviously, we are currently in the processing of installing some new lines within the business, and we'll update people on those as they come on stream. Secondly, we're in -- we're filling out what I would call distribution gaps in our FMCG or our food business. I'm not sure what you call them in the medicine business, but effectively, products that we are capable of supplying to the market, which we have not been tendering for or supplying to the market. So I think realistically, we would like to see that business grow aggressively over the next 3 to 5 years. We expect to see a very positive impact on the business this year. We'll discuss that in more detail as we go through each quarter.

Fares, next question is for you from [ Bilal Sabah ]. [ Bilal ] is asking, can you please give us guidance on the working capital needs in 2020? And what cash conversion cycle can we expect going forward?

Obviously, with COVID, the answer becomes very, I won't say, tricky, but rather no one can crystal ball what's happening. However, we do anticipate that we would be able to reverse part of the receivables and collect cash faster, especially for sales and account, as I've mentioned earlier. And on the inventory and payables side, we're looking at the situation very closely. We manage our relationship with suppliers, and at the same time, we have some -- we've obviously given COVID, as Garry mentioned earlier, some parts of our portfolio were sold quite well, but we also need to build for the future. So all I can say on the working capital conversion cycle is we do anticipate improvement. Can I quantify if we have our plans with certain numbers, but I can't reveal that.

Right. Next questions from [ Metehan Mathis ] for Garry. [Metehan] is asking, we expect to benefit from ventilator sales to hospitals from COVID-19-related respiratory issues. And how big our ventilator sales for Medtronics and Covidien?

Okay. So I can't answer for Medtronics and themselves. Unfortunately, the Medtronics business in Kuwait is split across 3 distributors on memory, and ventilators does not fit within our category. And so unfortunately, from a business perspective, I don't expect to see any benefit to the Medtronics business from the current scenario. As I said earlier, we are seeing real growth in our medical supply business, in our sanitizer business, but in those specific businesses, if anything, I would see them being slightly inhibited in the first quarter as people put off any discretionary operation.

And Fares, I'm going to take -- the next question I'm going to take is for Fares. And the question reads -- that is from -- also from [ Metehan ]. [ Metehan ] is asking, given the high leverage in the business, where do you see the business comfortable in terms of net debt/EBITDA in the medium term. Fares?

I think -- how can I summarize this? I think we're at where we think we're comfortable at. So just to put it into perspective, our net debt currently now is at KWD 74.4 million. Obviously, from an EBITDA perspective, this is above 3.5, closer to 4, which is where is a comfortable or maximum of the comfortable zone that we're in. However, the comparison is not necessarily fair. You have to take an annualized EBITDA for the businesses you have acquired in the second half and the growth -- the organic growth that's happened in the second half as well. So that being said, we do anticipate that that naturally drops throughout the year. But also hopefully, should we be able to reverse some of the working capital investment, we'll be able to reduce some of the borrowing as well.

Right. The next question is also from [ Metehan ], and it's going to be picked up by Garry. [ Metehan ] is asking, are there any restrictions on price increases for your Food Manufacturing and Distribution division products by the government?

[ Metehan ], again, the main restriction on our pricing would be within the co-ops in Kuwait, where that has to be approved by the union of co-ops before it can be applied to the market. If I understand the nature of your concern, it's probably around any inflationary impact on the business given the current disruptions to the supply chain. And so in that context, the Kuwait government has been very proactive in terms of providing support for any increased costs. So for example, if it was costing me $1 to ship something from India last week and that goes up to $2, they will pay the difference. And there is a formal scheme in place. We've already started applying for that scheme in various parts of the business. And that's really how they've chosen to ensure that their citizens and residents don't suffer through this tragedy.

Thank you. And just to manage everyone's time, we have 8 more questions to go, and they range on different topics from COVID, reaction to general business and capacity and some finance questions as well. So if you're thinking of asking a question, please send it over. We're still taking in questions. Next is from [ Meera Reddy ]. Her -- she has 2 questions. Her first question is, in the current COVID-19 lockdown situation, are you still seeing demand from the Catering segment? How will you be able to maintain profitability? And can we expect better operational efficiencies going forward and thereby, better margins?

Okay. On the Catering segment, we are still seeing demand in the market, where we have government contracts. And obviously, those are continuing as normal, in many cases. Some of them are slightly reduced, but broadly okay. And things like construction contracts or labor contracts, obviously, those labors are still there. They still need to be fed. And so those contracts are continuing as normal. Where we are seeing a marked reduction would be on private catering, where we would typically have serviced weddings, et cetera. That's a relatively small part of our business though. And that has been compensated by the quarantine meals that I referred to earlier. So from that perspective, we expect to be able to maintain profitability. And I'm a little bit worried about March in Qatar due to the people that we had in quarantine. Obviously, that's a significant number of people to pay and not get any value out of. But overall, we think it will watch its space and we'll be okay. And can we expect operational efficiencies going forward? Yes, I believe we have started to demonstrate those last year. And we're expanding gross margins, expanding EBITDA and we do expect to see that continue throughout this year.

Next question is from [ Khalid Moheb ]. [ Khalid ] is asking, should we expect higher profitability due to lower interest rates?

Khalid ] that -- we had our Board meeting yesterday. That was a topic of hot discussion. And obviously, that's been introduced to help offset some of the negative impacts of COVID. And again, the Kuwait government have been very proactive in dealing with the interest rates. Most of our borrowings is in KWD or dollar. So we will see those costs go down. But as I said previously, we will see positives and negatives out of COVID. And overall, we expect a balanced result based on our previous guidance.

Great. We're going to -- the next question we're going to ask is for Fares. The question is from [ Bilal Sabah ]. He's asking, is the guidance of the high double-digit growth for net profit in 2020 adjusted for the KWD 2.4 million nonrecurring write-down of intangibles or does it include them?

We should be achieving high double-digit growth, whether you compare it with the KWD 2.4 million or without. I think that answers the question.

Thanks. And we have also another question from [ Bilal ], fares. Question is, how much do you expect to save on finance costs going forward? Given lower rates, how much for each 25 basis point decline in interest rates?

I mean obviously, there's 2 factors for the interest expense. One is the volume of borrowing and one is the rate. So the rates are down, and obviously, we should be saving on that front. That being said, however, our borrowing has increased last year. They've increased last year, but mostly towards the second half of last year. So there would be an impact of growing interest expense throughout the year given the higher borrowing. And so we are able to start paying down some of the borrowings [Foreign Language] from the receivables unwinding. So obviously, we should be able to see some interest expense drop. I mean if you look at our borrowings, our borrowing is KWD 75 million -- net borrowings KWD 75 million. We're talking about roughly KWD 180,000 worth of 25 basis point drop in rates. That being said, you can't say we've dropped 4x from that, so we'll save KWD 1 million simply because we've had borrowings for longer period in 2020 than we would have had in 2019 given the timing of this borrowing.

Thanks. Next question is from [ Rajat ]. [ Rajat ] is asking, how is the UAE business doing in its recent development in terms of volume and pricing? And how should we expect UAE operations to perform in 2020, given the risk relating to tourism business. Garry?

[ Rajat ], we're definitely in crystal ball territory there. In terms of the impact of the various shutdowns in March, we have seen a substantial increase in our retail-led business and a substantial decrease in the on-premise business. It's important to note that the on-premise business forms a much smaller part of our business than the retail business. So I don't have the numbers in front of me, but we do see good growth in the UAE over the first quarter and in March. We are looking at our cost base and how we address the Food Services sector. Obviously, not only do we have a distribution outlet, but we have a meat factory, which is a large supplier to the fast food industry, in particular. So we're just working through the implications of that. But as I keep saying, there will be positives and negatives in this. But overall, we expect to be in line with our guidance.

And back to Kuwait, [ Rajat ] has the following question. What percentage of food business in Kuwait is through cooperatives? And do you expect any payment issues given the current situation?

[ Rajat ], and again, the -- in terms of the co-op business, 60% roughly, 55%, 60% of our business is through -- the retail business is through the co-ops. And that business is factored through a company called KFH. We've been operating under the new processes they've put in place for the last 3 weeks. And we have not seen nor do we expect to see any delay in payments from the co-ops. If the second part of your question refers to other customers, we took a decision when COVID hits to prioritize the service of the bigger retail chains and the cooperatives over the smaller businesses that we customarily deal with. And so therefore, we believe that, relatively speaking, we have a small exposure. And we are pushing very hard to collect that money throughout this month, but I don't see any risk emerge.

Next question is from [ Jagadishwar], it's for Fares. The question reads, why did receivables increase by KWD 20 million year-on-year? And any plans -- are there any plans to reduce them going forward? Net debt-to-EBITDA is 4.0x. Do you have any issues with covenants? What are your plans to reduce debt?

No. I think we've already answered quite a bit of this. I mean the receivables went up primarily on the back of acquisitions and whether acquisitions through companies or, at the same time, growth in working capital or investing in new brands, which means we invest in working capital than receivables. The second part is, obviously, we have plans to reduce them, as I mentioned earlier, that we'll try to unwind some of the receivable tied up, especially with some governmental accounts. The last bit of the question, I think, relates to plans to reduce debt. I mentioned that. The question part or the part relating to our covenants, no, we don't have an issue. As I mentioned earlier, it is -- if you look at net debt-to-EBITDA at a certain point in time, it's different than what actually the operations are. We have borrowed the additional money towards the end of the year. And we had no profit to show for the first 8 months or 9 months for that borrowing. So obviously, our EBITDA would have been higher had we acquired earlier in the year. We cannot be victimized on that. It's just the timing of when the deal closed. This applies to pretty much the growth initiatives that we've taken inorganically in 2019 being the KSPICO, Medtronic, Covidien and agencies bought. So obviously, if we were to take an annualized EBITDA on the current rates of performance of these subsidiaries or these new businesses, this net debt-to-EBITDA covenant would have definitely not been reached.

Fares, we have a follow-up question on the previous question asked by Meera. Meera is asking, with regards to the goodwill impairment block, which particular Saudi asset was impaired? And can we expect more of this going forward?

Okay. So we own -- Mezzan owns a company that's owned in Saudi, 100% ownership, direct and indirect. That's owned in the Mezzan Food Saudi Arabia, which is the operating subsidiary. So the impairment testing happens at the owner of the Mezzan Foods entity, which is the holding of that entity is under a different company, which you've seen the financial [indiscernible] or Mezzan Saudi Arabia. So it relates to the -- the actual impairment is triggered by the results of the Mezzan Foods Saudi. But obviously, Mezzan Foods as the entity that the industry isn't impaired the ownership through the shares of the company that owns it, which is Mezzan Saudi. At the end of the day, we control both and we own both and it's all consolidated under Mezzan. So that's why it obviously comes up to the Mezzan level.

Thanks. Next is the question from [ Hamed ] [indiscernible]. It's going to be picked up by Garry. [ Hamed ] is asking, can you describe the process of your business in Afghanistan purchases in advance? And how frequent is the renewals of your customer contracts? When is the next renewal?

[ Hamed ], if I -- again, I will try to answer that briefly. Feel free to ask a follow-up, if I'm not clear. So within Afghanistan, we broadly have 2 businesses. We have a bakery business and we have a fresh fruit and vegetables business. Within the bakery business, we currently have a supply chain of about 2 months. And we've just expanded that over the last week to 4 months, given the current circumstances. On our fresh fruits and vegetables business, which is the second business, we engage in contract farming, where we would typically have commitments out for about a year. Currently, those are in place, and we have no intention to expand them. I don't believe COVID will warrant holding extra stock in that area or commissioning to extra stock in that area. In terms of our customer, our customer is typically -- the way it operates is you get a 5-year contract. And there are then a number of 1-year extensions and depending on the particular circumstances. On Tuesday last, I believe -- sorry, Monday last, our customer was awarded the next 5-year contract. So obviously, there's no commitment in terms of numbers or anything like that. But physically, they have the contract now for the next 5 years. And obviously, that will come up for tender in another 4 years, say. I hope that answers the question.

Next question is from Aly Adel. Aly is asking, can we get more color about your -- about your water business in Qatar?

Yes -- sorry, Aly, I'm not Fares. The business in Qatar is tough. And we -- when the embargo went down, obviously, all water exports from Qatar were stopped. At the time between, 40% and 50% of all water produced in Qatar was exported. And the government decided to introduce more water licenses to ensure supply. And so the market has wound up being -- having extreme overcapacity. I think it's fair to say. And despite that, we maintain our #2 brand position in the market. The team are working extremely hard. We've invested to reduce our cost base through installing a preform line there. And as we mentioned -- as Fares as mentioned previously, we've also built a snack factory on that site to spread the load a bit more. The site made substantial progress last year, and we expect it to make substantial progress again this year. And -- but it is [indiscernible] every single day.

Thank you, Garry. And I think I'll just take a quick look at the questions. Yes, we have answered every single question we have got, and we're not getting any more question. I think with that, we'll conclude today's call. Thank you, Fares, and thank you, Garry, for taking the time to answer all these questions and going in detail in your answers. We will be concluding the call right now. As I said earlier, a live recording of this session will be available on the same link you used to access the live one in about 2 hours or so. Thank you, everyone, for joining. We'll see you in the Q1 call. And for now, have a good day, and stay safe.