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

Good afternoon, ladies and gentlemen, and welcome to the Mezzan Holding call to discuss the company's earnings for the first half of the year ending on June 30. This webcast covers Q1 and Q2 results. Today is Wednesday, August 12, 2020, and this call is held live from Kuwait and Dubai. A recording of the call will be available on the same link within 2 hours. The earnings we will be discussing today were filed and announced about a little less than 24 hours ago. They have also been posted on Boursa Kuwait's website, and they are also available on our website, mezzan.com. My name is Fawaz Al-Sirri. I'm the moderator on the call today. And I am joined as well with today's speakers, Mr. Garry Walsh, the group 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'll soon hand over the mic to Garry to kick off the call. But before I do, allow me to take you through the format of the call. For the next 10, 15 minutes, the speakers will make their respective statements, after which we will have a Q&A session. To participate in the Q&A session, just type in your question on your screen at any time during the presentation starting from right now. And then we will take on your questions during the Q&A session. I would 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 your question. 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, you may start.

Good afternoon, everyone, and thank you, Fawaz, and thank you all for joining us. We hope that you and you families and colleagues are doing well and staying healthy in these times. I would like to start this call by stating that these are quite difficult times for all of us, and that we at Mezzan and all of our employees, from the frontliners and support teams, are doing whatever we can to continue putting food and beverages, medicine and other health care supplies on the shelves for our consumers and have taken the reasonable and required measures to ensure the health and safety of our staff. I would also like to extend a sincere thank you message to each member of the Mezzan family, who has, for the past few weeks, particularly doubled their efforts to make sure that the communities we serve in the region and elsewhere are able to find our portfolio at all times. I would like to remind everyone that within March of this year, Kuwait's Capital Markets Authority required all listed companies on Boursa Kuwait to publish its interim financial statements for the 3-month ended period 31st of March 2020, only whilst publishing their interim financial statements for the 3-month period and 6-month period ending 30th of June 2020. And as such, I welcome the opportunity to share with you our results for the first quarter and second quarter of the 2020 in this call. Today, I will take you through a short presentation, discussing both the tailwinds we enjoyed and the headwinds we faced during this last year. I will then go through financial highlights, after which I will hand over to Fares, who will take you through the details of the financial performance. And lastly, as Fawaz said, we will be opening the floor for questions. I'd like to start with a note on the impact of COVID-19. Allow me to start by stating that as a company operating in the consumer space at large, COVID presents both opportunities and challenges to our operations. That depends on the country of operation, the product portfolio or service offering and sales channel. For example, while we saw high demand for parts of our portfolios, such as essentials like rice, vegetables, tuna and detergents and sanitizers, we saw other parts of our portfolio witness a drop in demand, such as nonsanitizer, detergent, consumer and beauty products and nonessential food stuff. While we also saw a high demand for the modern trade and cooperative sales channels, we saw a diminished sales to other segments of the market such as food service, schools, wholesalers and distributors, particularly in managing credit risk as well as exports due to a shift -- a shutdown for a good portion in half one. For example, while we were able to pick up some catering business to serve quarantine locations, we lost other catering businesses such as private catering. From a tailwinds perspective, I'm glad to say that the first half of 2020 witnessed improvement in our operational performance, driven both by the organic as well as recently completed inorganic transactions in the second half of last year. We witnessed top line growth in all our core business units. However, I would like to highlight strong performance in the food manufacturing, distribution, catering as well as FMCG and Healthcare segments. Each of these core units grew by healthy rates in the first half of the year. Our Kuwait operations, our home markets, saw double-digit rate of growth driven by both inorganic and organic initiatives as well as opportunistic sales. We also witnessed enhanced profitability measures, where in half 1 2020 GDM enhanced by 80 basis points and EBITDA margin enhanced by circa 60 basis points. Key to note that this was driven by economies of scale and impact of operating leverage as well as better cost control measures. Lastly, we were successful in bringing our debt levels down by circa KWD 16 million from the levels of December 31, 2020, as a result of enhanced working capital management. From a headwinds perspective, we saw some sectors performed worse than last comparable period due to closure, full or partial, of segments of markets as part of repercussions of COVID-19. We witnessed some ongoing interruption of operations in Qatar, which weighed down on both revenue and performance in our operations in that market. We believe that these interruptions have so far subsided in Q3. And directionally, we should be heading back towards positive territory. We also saw demand from food service industry drop given low activity during the closure and lockdowns or curfew. This led to a drop of sales in the UAE in particular. We started seeing some encouraging reversal of these trends over the last few weeks as locked down eased, and we've seen commercial activity rise since. We also witnessed a lot of one-off expenses of relocating staff from certain labor accommodations to on-site accommodations as approved by regulatory authorities to ensure undiminished business during lockdown periods. As for the financial period for half 1, I'm happy to report that Mezzan recorded improved operational and financial results as evidenced by enhancements in key operational metrics, including revenue, gross profit, gross profit margin, EBITDA, EBITDA margin as well as net income and net income to shareholders of the parent company. Today, we will announce the results of both Q1 and Q2 2020 in accordance with the requirements of the Kuwait Capital Markets Authority. As such, the presentation will address both periods as well as half 1 2020. In terms of our financial highlights and headline numbers for the half ended 30 of June 2020, Mezzan's reached KWD 134.3 million, up from KWD 115 million in the previous comparable period for a growth of 16.7%. Gross profit reached KWD 31.9 million compared to KWD 26.3 million in the comparable period for an increase of 21.3%. Gross profit margin enhanced by 90 basis points to reach 23.8%. While EBITDA reached KWD 15.8 million, up from KWD 12.8 million in the previous year, for an increase of 23.2%, EBITDA margin also increased by 70 basis points to reach 11.8%. The group achieved a net profit of KWD 9 million during the first half of 2020 compared to KWD 7.2 million in the first half of last year, an increase of 25.4%. And net profitable margin increased by about 50 basis points to reach 6.7% compared to 6.2% in the comparable period. Finally, Mezzan's net profit to shareholders of the parent company reached KWD 8.1 million during half 1 2020 compared to KWD 7.3 million during the comparable period of the previous year for an increase of circa 11.1%. In terms of our financial headlines -- highlights and headline numbers for Q1 ended March 31, 2020, Mezzan's revenue reached KWD 74.4 million, up from KWD 62.6 million in the previous comparable period for a growth of 18.8%. Gross profit reached KWD 16.6 million compared to KWD 14.5 million in the comparable period for an increase of 14.6%. While EBITDA reached KWD 8.6 million, up from KWD 7.9 million in the previous year for an increase of 8.8%. This is important in light of the increased production capacities and efficiently enhancing our activities we completed over the last couple of years. The group achieved a net profit of KWD 5.2 million during the first quarter of 2020 compared to KWD 5 million in the first quarter of 2019, an increase of 2.7%. Finally, Mezzan's net profit to shareholders of parent company reached KWD 4.6 million during Q1 2020 compared to KWD 5.1 million during the comparable period of the previous year. The drop resulted from a higher ownership of Mezzan Foods in KSA as Mezzan acquired an additional stake of 29% towards the end of last year as well as a number of one-off expenses for COVID-19. In terms of our financial highlights and headline numbers for Q2 ended 30th of June 2020. Mezzan's revenues reached KWD 59.9 million, up from KWD 52.4 million in the previous comparable period for a growth of 14.2%. Gross profits reached KWD 15.3 million compared to KWD 11.8 million in the comparable period for an increase of 29.5%. Whilst EBITDA reached KWD 7.2 million, up from KWD 4.9 million in the previous year for an increase of 46.3%. This is important, again, in light of the increased production capacities and efficiencies we completed. The group achieved a net profit of KWD 3.9 million during the second quarter of 2020 compared to KWD 2.2 million in the second quarter of 2019, an increase of 77.9%. Finally, Mezzan's net profit to shareholders of the parent company reached KWD 3.5 million during Q2 2020 compared to KWD $2.2 million during the comparable period of the previous year. At this point, I will hand over to Fares to take you through the financials in more detail and discussing the performance of Q1 and Q2 2020.

Thank you, Fawaz. Thank you, Garry. I hope everyone is keeping safe. As Fawaz stated earlier that we are joining this call from multiple areas and, as such, there might see be delay. I apologize for that. And as Garry mentioned earlier, we will discuss the results in this call for both quarter 1 and quarter 2 as well as H1 2020 in accordance with the requirements of the Capital Markets Authority. If we move now to revenue contribution by business line at Mezzan Group, during the call, I'll start talking about H1 and then every quarter separately. In H1 2020, the Food Group accounted to 66.9% of total group revenue in H1 for a growth of 1.5% compared to H1 2019. While the revenue of non-food group accounted for the balance of 18.1% for the total group revenue for a growth rate of 34.8%. As for Q2 2020, Mezzan's Foods Group accounted percentage 72.9% of total group revenue, and that was a growth rate of 10.4% compared to the previous comparable period. While revenue of non-food group accounted for the balance of 27.1% for a growth rate of 26.3%. In quarter 1 2020, the Food Group accounted for 62.2% of total group revenue for a growth rate of 8.6% compared to the previous comparable period. Non-food Group accounted for the balance of 37.9% of total group revenue for a growth rate of 40.3%. For details of the segments, in H1, within the Food group, food manufacturing and distribution contributed to 46% of revenue in H1 2020 registering a strong 10% growth comparable -- compared to previous comparable period, which was driven by strong performance in Kuwait and UAE. Our catering business contributed 14.3% of H1 revenue in 2020 for an increase of 7.5%, driven by Kuwait operations as we fixed up new opportunities. The revenue from our Services segment within the Food group increased by 10% in the first half and contributing to 6.7% to H1 2020 revenues. Within the Food Management Group, FMCG and Healthcare, had a very solid performance in the period ended 30th of June 2020. And the revenue in the segment now accounts with 81.5% of Mezzan's H1 2020 revenue for a growth rate of 39.6% compared to comparable period in 2019. This growth was particularly driven by acquisitions of which we completed late last year in the second half of last year. While revenue of Industries group declined by 21% and contributed to 1.5% in H1 2020. As for Q2 2020 within the Food's group, food manufacturing distribution contributed 27.9% of the revenue in quarter 2, registering a strong 9.2% growth compared to previous comparable company, which was driven by strong performance in Kuwait, UAE and Saudi from a top line perspective. Our catering business contributed to 17.5% of quarter 2 revenue in 2020 for an increase of 16.5%, driven by group operations as explained earlier. Lastly, revenue from our Services segment within the Food Group increased by 4.6% in the second quarter and contributed 7.5% of the revenue in that quarter. Within the Non-food group, FMCG and Healthcare had a solid performance in the period. Again, revenue of the segment accounted for 25.7% of Mezzan's Q2 revenue for a growth of 31.4% compared to comparable period in 2019. This growth was driven again by acquisitions that were completed in the second half of last year, while revenue of Industrials group declined by 25.3% and contributed to 1.4% in that quarter. In quarter 1 2020, within the Food group, Food manufacturing and distribution contributed to 44.6% of revenue in quarter 1, registering a strong 10.7% growth compared to previous comparable period, which was driven by strong performance in Kuwait and the UAE. Our catering business contributed to 11.6% in Q1 of 2020 for a decline of 1.7%, although this is not [indiscernible] in that quarter. To the contrary, the catering business witnessed growth and portability during that period. Last year, revenue from our services that went within the Food Group increased by 15.8% in Q1 and contributed 6% of 2020 revenue. In our Non-Food group, FMCG & Healthcare, again, had a solid performance in the first quarter ended 31st of March 2020, and the revenue of the segment now accounts for [ 36.2% ] of Mezzan's Q1 2020 revenues for a growth of 24.8% compared to comparable period of 2019. The growth was driven again by organic and inorganic growth within the Healthcare segment. While revenue for the Industrials group declined by 17.6% and contributed to 1.6% in quarter 1. Moving on now to discuss the operations per geography. In the first half of H -- sorry, in the first half of 2020, operations in Kuwait contributed to 75.5% of Mezzan's revenue, up 23.6%, resulting from strong performance in food manufacturing and distribution and Non-Food FMCG and Healthcare business alike. Revenue from our operations in the UAE decreased by [ 2.4% ] compared to H1 2019 on the back of lower food service business like restaurants and hotels activity. Revenue in Qatar decreased by 5.7% in H1 2020 compared to H1 2019 and now contributed to around 8% of Mezzan's revenue. The drop is on the back of business interruption that Garry had mentioned earlier. Saudi Arabia business accounted for 1.9% of Mezzan's revenue in H1 2020 for an increase of 0.5% compared to the previous comparable period. In Jordan the sales increased by 6.9%, and that margin contributed 2.2% of Mezzan's revenue. And then H1 2020 revenue from operation Afghanistan was almost flat up by 0.1% during H1. This market accounts for [indiscernible] for 2.2% of the Mezzan's operations accounted for 1.1% of enhanced total. In the second quarter of 2020, Kuwait contributed 74.4% of Mezzan's top line and was up 21.6%, resulting from strong performance of food manufacturing distribution and Non-Food, FMCG and Healthcare business alike. Revenues from our operations in UAE decreased by 6.2% to Q2 -- compared to Q2 previous period of 2019 due to the partial lockdown and lower food service activity felt in Q2 2020. Revenue in Qatar decreased by 7.8% on Q2 2020 compared to Q2 2019 and contributed to 8.8% of Mezzan's revenue. This drop, again, is due to the partial interruption of operations, which have since subsided. Saudi Arabia accounted for 2.4% of Mezzan's revenue in Q2 for an increase of 19.1% in Q2 2020 compared to 2029 -- compared to Q2 2019. The increased resulted is from securing new stock in Saudi Arabia to a [indiscernible] effect in [indiscernible] online delivery. In Jordan, the sales increased by 17.4%, and the market contributed 2.3% of Mezzan's revenue. The revenue from operations in Afghanistan within the second quarter were slightly down at 3.5%, and the market accounts for 2.7%, while operations in Iraq accounted 12.1% on the [indiscernible] front. Talking about quarter 1 2020 compared to quarter 1 2019 per geography, Kuwait contributed 76.4% of Mezzan's top line and was up 25% resulting from strong performance again from Food manufacturing distribution and Non-Food, FMCG and Healthcare. Revenue from operations in UAE increased by 0.7% compared to the previous period. Revenue in Qatar decreased by 8.6% in Q1 2020 compared to Q1 2019 and contributed 7.3% in revenue. Operations in Saudi Arabia accounted 1.7% of Mezzan's revenue in quarter 1 2020, but a decline of [ 0.7% ]. And in Jordan, sales were down by 2% and that market contributed 2% to Mezzan's revenue. Finally, revenue in a Afghanistan were up by 4% during quarter 1 2020. This market accounted for 2% of Mezzan, while operations in Iraq accounted to 1% of Mezzan's top line. Moving to profit and loss. We will first discuss H1 and then Q1 and Q2. As Garry has mentioned earlier, revenue has reached KWD 134.3 million in H1 2020 for an increase of 16.7% compared to H1 2019. As I explained before, this was driven by top line, both Food and Non-Food segment alike as well as some organic and inorganic initiatives. Gross profit reached KWD 31.9 million in H1 2020 compared to KWD 26.3 million in the previous comparable period, and the gross margin reached 22.7%, by an axis of around 80 basis points. Selling, general and administrative expenses increased by 20.1% in H1 2020 as with comparable period ended 30th of June 2020, mostly on the back of new businesses and acquisitions that weren't there in the first half of last year. EBITDA reached KWD 16.8 million in H1, up from KWD 12.8 million in the previous period for an increase of 20%. This is important in light of the increased production capacity and efficiency and initiatives that were completed recently as well as the inorganic growth and continued over the past few years. Financing cost and other expenses increased to KWD 1.9 million in H1 2020 compared to KWD 1.7 million in H1 2019. Management cost increased by around KWD 42 million compared to last year, primarily funding the acquisitions and growth in working capital, which were completed in the second half of last year. The increase in attributable client borrowings due to the filing. In summary, net profit had reached KWD 9 million in H1 2020 ended -- for the period ended 30th of June, higher by 25.4% from the comparable period of 2019. Net profit attributable to equity holders of the parent company reached KWD 8.1 million in H1 2020 compared to KWD 7.3 million in the comparable period of 2019 for an increase of 11.1%. To discuss now Q2 P&L. Mezzan Group recorded revenues of KWD 49.9 million for an increase of 14.2% compared to Q2 2019. This came in from both Food and Non-Food segment. Gross profit reached KWD 50.3 million in the second quarter compared to KWD 11.8 million in the previous comparable period, and the gross profit margin reached 25.5% for enhancement of around 300 basis points compared to the gross profit margin of 2019 Q2. Selling and general administrative expenses increased by 19.1% in Q2 2020, mostly on the back of new business. EBITDA reached KWD 7.2 million, up from KWD 4.9 million in the previous period for an increase of 46.3%. Financing costs and other expenses reduced slightly to KWD 0.85 million in the second quarter 2020 compared to KWD 0.81 million in the second quarter of 2019. Financing costs increased by around KWD 404 million compared to last year on the back of funding the acquisitions and the working capital that was incurred in the second half of last year. Now also reflecting the lower borrowing rates, which started towards the end of quarter 1 this year. Net profit for Q2 2020 reached KWD 3.9 million. compared -- which is higher by around 77.9% compared to the comparable period of last year. Net profit attributable to equity holders of the parent company reached KWD 3.5 million in Q2 2020 compared to KWD 2.2 million in the comparable period of 2019 for an increase of 55.2%. Discussing the P&L of Q1 2020. Mezzan Group reported a revenue of KWD 74.4 million for an increase of 18.8% compared to Q1 2019. As explained before, this was driven by top line growth in almost all key markets. Gross profit reached KWD 16.6 million in Q1 2020 compared to KWD 14.5 million in the previous comparable period, and the gross profit margin reached 22.3%. SG&A expenses increased by 21.2%, again, mostly on the back of new business acquisitions. EBITDA reached KWD 8.6 million, up from KWD 7.9 million in the previous period for an increase of 8.8%. And this is an important, one more time, as we've increased production capacities and efficiency we have in projects that we've taken as well as inorganic growth that we've competed recently. Financing cost and other expenses increased to KWD 1.4 million in Q1 2020 compared to KWD 0.8 million in Q1 2019. The financing, of course, increased by around KWD 0.2 million, again, to fund the acquisitions of KISPICO as well as the funding on the working capital of the new business. It is key to note here that the lower borrowing rates were witnessed towards the end of Q1, so the impact of that was in this quarter, Q1 2020 as a relative. To summarize, net profits have reached KWD 5.2 million in Q1 2020 for the period ended 31st of March, higher by 2.7% per spend on a comparable period in 2019, which were KWD 5 million. Net profit attributable to equity holders of the parent company was KWD 4.6 million in Q1 2020 compared to KWD 5 million in the comparable period of 2019 for a decrease of 8.4%. It is key to note here that in quarter 1 2019, Mezzan had aimed 70% stake in Mezzan Foods in Saudi Arabia. While it's only a 99% stake in that facility in Q1 2020. And hence, [ we had more ] assets to shareholders of the parent company. In addition, we refer to profits and recently acquired nonfully owned operations [ by taking a look the plans ] of the profits of such operations in [indiscernible]. And we specifically explained part of the drop in net profit activity due to equity holders of the parent company in Q1 2020. Moving on to cash flow. Again, I'll talk about the cash flow in H1, and then we move to Q2 and then Q1. Mezzan recorded operations cash flow before working capital changes of KWD 80.1 million in H1 2020, up by KWD 5.1 million from the comparable period of the previous year on the back of larger business activity. In H1 2020, we have reported an inflow of working capital, saw a capital cash flow inflow of KWD 4.1 million compared to an investment in working capital of KWD 11 million in the previous comparable period on the back of enhanced of working capital management, [ keeping ] that Mezzan's cash flows from operating activities reached KWD 22.2 million in H1 2020 compared to KWD 2 million in H1 2019, which is an important milestone for Mezzan Group. Cash flow using investment activities reached KWD 2.4 million mostly on the back of maintenance CapEx. As such, we recorded positive cash flow before finance activities of around KWD 19.8 million in H1 2020 compared to minus KWD 0.4 million in H1 2019. And as such, our net debt has decreased by around KWD 17.3 million in H1 2020 compared to an increase of KWD 7.7 million in the comparable period of 2019. The enhancement of cash flow in H1 was driven primarily by Quarter 2, while operating cash flow before working capital changes of KWD 8.9 million in Quarter 2, which were up by KWD 3.8 million from the comparable period on the previous period. Positive working cash flow of KWD 7.9 million compared to investment of KWD 5 million in 2019. Cash flow from operating activities reached KWD 16.8 million in the second quarter of 2020 compared to KWD 0.1 million in quarter 2 2019. Cash flow used in investment activities reached near KWD 0.4 million compared to KWD 1.2 million in the previous period. As such, in quarter 2, we reported cash flow before financing activities of KWD 16.4 million compared to investment of KWD 1.1 million in the second quarter of 2019. And as such, the net debt has decreased by around KWD 15.3 million in the second quarter compared to an increase of KWD 7.3 million in the comparable period of 2019. From a cash flow perspective, again, in quarter 1, operating cash flows before working capital changes were KWD 9.2 million in quarter 1, up by KWD 1.3 million from comparable period. In quarter 1, we invested KWD 3.8 million in working capital compared to investment of KWD 6 million in the previous comparable period. Cash flow from operating activities reached KWD 5.4 million in Q1 2020 compared to KWD 2 million in Q1 2019. Cash flow used in investing activities reached KWD 2 million in quarter 1, mostly on the back of maintenance CapEx. Hence, the positive cash flow before financing and investing activities amounted to KWD 3.2 million in quarter 1 compared to KWD 0.8 million in for Q1 2019. And our net debt within the quarter 1 had dropped by KWD 2.1 million compared to an increase of KWD 0.4 million in Q1 2019. Moving on to the balance sheet. At the 30th of June 2020, Mezzan's balance sheet side have reached KWD 263 million, an equity of around KWD 107 million and net debt of KWD 58 million. As the next slide shows, assets, equity and net debt were KWD 277 million, KWD 119 million and KWD 273 million as of 31st of March 2020. I would like to highlight and note on results in indebtedness. In the chart here depicts the level of borrowing as measured by net debt. And as you will see, our net debt has spiked in September 2019 to reach KWD 75.5 million when we funded the acquisitions of the majority stake acquisition of KISPICO as well as working capital funding for other growth opportunities. We're glad to see that our net debt levels have gone down considerably. And as of June 2020, we have reached KWD 57.6 million. I move now provide to go through the Q&A session.

Thank you, gentlemen. Thank you, Garry, and thank you, Fares, for taking us through 2 quarters this time at a time. These are unusual times indeed. We will now be taking in our audience's questions. We have a couple of comments coming in. Just give us a minute, and we will take them one by one. We're going to start off with a question from Aly Adel from Beltone Financial. Ali is asking well -- he's saying first, congratulations on the results. Have you started witnessing a pickup in products that were impacted in the first half or a slowdown in products that had good performance during the same period? His second question, Garry, you will be taking this one. His second question is do you see expats leaving Kuwait affecting the demand side? And can you share the average annual change in number of expats in Kuwait to date. His -- the third part of this question is, can we expect second quarter gross profit margin levels sustainable going forward? And I think that's 4 questions, and one I'll hand over to Garry.

Ali, in terms of have we started with the pickup in products that were impacted in half 1? And yes, we have. But again, as we said, it really is very channel dependent. So if I give you an example, within Kuwait, we've started seeing a recovery in the beauty products that we do there. And in that particular instance, the other FMCG products have also continued to perform strongly. On the food service side, I would anticipate that in August, we'd probably be back to 60% to 70% of where we were pre COVID. So it is recovering, but slowly. So far, we haven't really seen a let up in the products that we had a pick up in. And however, we have seen sectorial changes. So for example, in catering in Kuwait, we've moved back from supplying quarantine meals to supplying our regular contracts. So it really is sectoral by sectoral, and we're just having to watch it every single day. In terms of the expats leaving Kuwait, as we all know, the majority of demand in Kuwait is driven by the Kuwaitis, and that's where the purchasing power sits. And yes, share of troth is an important measure, and the number of troths will decline. However, we don't see it as having a material impact on the business over the short to medium term. In terms of the actual expats who've left, I don't have those numbers at hand, but Fares is a bit of a numbers Bob show. I'm sure he can find them and e-mail them off to you. And in terms of the gross margins, we would certainly, as we flagged during our call on our year-end numbers, we certainly expect to see the gross margins continue to be positive year-on-year. And again, it depends on the mix of business where that settles out, but certainly expected to be positive year-on-year.

Thank you, Garry. Next question is from Bilal Sabbah from Jadwa Investment. Bilal is asking, can you please provide some feedback on the following: one, it seems that margins improved year-over-year in the second quarter at a larger magnitude than the first quarter. Can you point out the reason for that? His second question is, do you see improved margin performance in the first half sustainable? That was similar to the questions that we just answered from Ali. Do you see it sustainable for the rest of 2020 and 2021? Three, how do you see revenue growth for the remainder of 2020. And four, do you comment -- can you comment on the difference minority interest expenses in the first half compared with the first half '19, last year. His fifth question is, do you plan on reducing debt further during the remainder of the year? Garry?

Okay. These multi-part questions are becoming a theme. In terms of the first question, which was related to the margins in 2Q versus Q1. Q1, for us, is -- always has been and always will be skewed by the behavior of the co-ops in Kuwait and where they essentially buy probably 40% of their consumption for a year in that first quarter. So the business will all -- the margins will always be skewed by that. And that is the large reason for the difference between Q1 and Q2, and that's kind of a constant theme year-on-year. In terms of do we see the margin performance in half 1 sustainable? As I said, depend -- we certainly see an improvement being sustainable. And at the moment, there's just so many moving parts. And you're trying to get the balance right between having a strong supply chain and guaranteed products available for your consumers, at the same time, not being overstocked and at the same time, coping with price fluctuations for all of your supply chain, positive and negative, driven by the impact on their businesses of COVID-19. So as I said, we expect to see the margins continue to be positive year-on-year, but I wouldn't want to put a number on that. And on the revenue growth side, I think we guided high double digits at the outset. And I think we've maintained that view. And as a point of interest, we are actually internally bang on line with our projections, albeit the mix has changed substantially. So I don't see our guidance in terms of year-on-year changing at all or year-end changing at all? On the minority interest, I believe this question was posted before Fares explained that during his commentary. But if I've misread that, please feel free to repost and Fares will answer it the second time around. And do we plan on reducing debt further during the remainder of the year? And yes, we would certainly like to. But again, it's a balancing act. We're currently probably carrying more stock than we would like in -- on the off chance that there will be a second wave of COVID. And really, our guess will depend on our ability to unwind that and depending on what way things go. I'm sure Fares and his team will continue to do the improved job on receivables and payables that they have been doing so far. But the stock really is a big determinant of where we wind up.

Next up is a question from Meera Reddy from SICO Research. This question is for Fares or Garry, do you want to take that? Okay. Garry is going to take that. Meera is asking so it's just a 3-part question. So we'll just take it 1 by 1 this time. Okay. So the first question is what was the primary growth driver in FMCG and Pharma segment, organic or inorganic growth?

Obviously, the primary was inorganic because we made acquisitions. However, there was good growth within the organic as well, and again, in line with our expectations. As I referred to earlier on, a real shift in mix with sanitizer products going through the roof and other products such as makeup remover, shampoo, et cetera, not performing as well given that people effectively were not going out.

And you've also did some inorganic growth. What was the speaker's contribution to revenue and profits in the first half?

I don't think Fares would allow me to answer that. But if Fares does choose to answer that, he can come in at the end of this question and answers.

Great. Meera's second question is, can you throw more color on the Food Manufacturing division and Distribution segment and the quarterly seasonality in revenue?

I think I answered that already, where you really see a very strong performance in Kuwait food during Q1 versus the rest of the year. I mean even if you look at this period where you would say it was COVID hit, I think Q1, from memory, for Kuwait food was about KWD 26 million, and it's KWD 24 million in Q2. So we really do see a very, very strong first quarter, and that happens every year. It is the way our business is driven. In terms of looking forward, we expect to see, over the years, strong growth in all of our different food segments.

So Garry, Meera is asking about gross margin you expect going into the second half. So one more time, what's your outlook?

As I said, we expect a definite improvement year-on-year. And it really depends on the channel. Each channel has its own margins. I think we know whatever the scenario is, we will improve. I think the challenge will be by how much in each channel, depending on how the markets move over the next 6 months.

Great. I have a couple more questions. Let me just go through them for a sec. Okay. While I go grow through them, Fares, I'm going to throw a question at you just to not keep people waiting online. Fares you have question from [ Akbar Khan ] from Arayan Investments. [ Akbar ] is asking, excluding M&A, where do you see debt in 12 months? Is there a target level for gearing -- of gearing.

Sure. So basically, to put things in context, Mezzan's debt levels have went up since acquisition. And that's typical for companies that through an acquisition, especially when these acquisitions are transformational in nature. And we've worked hard in the last 6 months to pay down as much of the debt down -- handed now. We were able to reduce our debt from KWD 75.5 million in September to KWD 57.6 million in 2020 so far. In terms of level of gearing, obviously, historically, we've maintained anywhere from 2x to 3x EBITDA. We're now hovering at around 2.4x and obviously, that takes into account the last 12 months. And the current last 12 months, and a current last of month period includes H2 2019. So obviously, we look forward to getting that reduced even further from a multiples perspective. So I hope that answers the question.

Thank you. This other one is a question for Garry, it's from Jagadishwar from Franklin Templeton. The question reads, why did KSA revenue decline year-on-year in the first quarter of 2020? Is KSA growth in the second quarter sustainable going forward? And why did the gross margin decline in the first quarter?

In terms of KSA performance in Q1, coming into the year, we made a very definitive and choice in terms of what channels we wanted to play in. And that was reflected in Q1. And in terms of Q2, we obviously saw that really starting to play well where we had significant year-on-year growth. And yes, we would expect that to be sustainable over the year. And in terms of the gross margin decline in first quarter, I'm assuming that's the same question again, which I hope is asked and answered.

Thanks. Next up is a question from [ Fatima Dosiri ] from [ SICO ]. Multiple questions in one, so I'll just -- we'll do them 1 by 1. We'll take them one at a time. Question, what has led to the weak bottom line performance in the food and catering business in the first quarter of 2020? Fares? I'm going to read that question again to you since you're not in the same room. The question was, what has led to the weak bottom line performance of the food and catering business in the first quarter of 2020?

Sure. Again, as we always said, the key to -- so if I heard the question -- sorry again, because I'm not in the same room, it relates to the catering segment, yes? If it doesn't...

Mainly food and catering, Fares.

Food and catering. So basically, it depends on the portfolio. So in terms of the mix, catering in our few contracts or numerous contracts in Kuwait and at Qatar and as such, it depends where we are in the life of certain contracts as they move on to either, if possible, to if we win them, then when they come on board if they're using on when they leave the portfolio. So that's on the catering side. On the food manufacturing and distribution, again, there is a lot of moving parts, as we said. There are certain sales channels that went up, certain product portfolios that went up. So as Garry mentioned in the very first slide of this presentation, there is certain winners and certain losers, and we definitely see some movement within the portfolio as such. So depending on where we are on the portfolio.

Thanks. Fares, [ Fatima ] has a second question -- she has actually 4 questions. Her second question is, could we get an update on KSA improvement in sales in the second quarter of 2020?

Right. So I'll answer that. Obviously, Saudi, we are putting more products on the shelf slowly but surely. And as Garry mentioned, we took some decisions earlier on this year to -- and even the last few quarters, but more so this year, to go to certain sell channels directly ourselves. And we definitely saw a better pick up in the second quarter as we are doing stuff within our own infrastructure as opposed to selling to other distributors. So that's on Saudi sales growth. What was the second bit, Fawaz?

Can we get an update on the KSA improvement in the sales in the second quarter? And do you believe that the business has turned around?

Sorry. I believe I just said the first part of the question, I just answered that. And in the second part, we do believe that Saudi is a work in progress, but we definitely hope that we are progressing our operations over there. So we definitely are work that has been -- a lot of this work has been done in the past, and we hope that's reads out in the yields offer.

Thank you. [ Fatima ] is also asking Fares that there is a significant jump in catering business in the second quarter. What has contributed to that?

Sure. Well, catering, we do operations in both Kuwait and Qatar. So again, just like everything, and as Garry mentioned in the very first part of this presentation, we can't see 1 big brush and paint inside an image with it. Some catering business went well. We were able to pick up some opportunistic sales in catering in Kuwait, while we also see so far some of the catering business dropped, for example by catering or subsidiary catering that -- in Qatar, for example, we witnessed some weakness in sales, but net-net [ Fatima ] it was a net positive for us.

I think [ Fatima ], it's just worth mentioning, I mean, overall, I think versus our internal projections, our catering turnover across the 2 markets at the end of the half year was broadly in line with our projections. So as far as you win some contracts, you lose some contracts. The -- obviously, COVID has driven that from the floor or through that roof in terms of fluctuations. But overall, we were in line with our projections at the top line level.

[ Fatima's ] last question is if you could provide an update on your receivables, especially those related to the pharmaceutical business acquired. Garry?

So as I think we've mentioned on these calls before, we factor our guest. And we have rolled with the MOH in place. And we enrolled the new pharmaceutical businesses in under that arrangement, which we believe is the right thing to do and give us some very good payment profile versus the health market in general in Kuwait. In terms of the customers for those businesses outside Kuwait. And we continue to manage those relationships well and closely, and we're always trying to reduce our receivables. But at this point, we don't see any issues of concern.

Thank you. We have one last question on for today's call. Give me a second, please. We have [ Amgreen Jalwani ] from [indiscernible] Capital is asking what were the net margins for each of the segments during the period? I believe that Mezzan doesn't disclose those numbers, but nice try. What are the normal margins for these business segments? And three, are you witnessing a closure of small stores, restaurants in the economies you're operating in? And what's the expected outflow of white collar ex-pats? So I think, Garry, if we can just focus on the last 2 parts. Are you witnessing a closure of small store and restaurants in the economies you're operating in? And have you seen expected outflow of white collar ex-pats.

Sure. I think certainly, a passion of closures is probably 1 of the few common themes across our portfolio at this stage, where we see in every country those smaller, particularly restaurants, closing but also some of the [ locals ] is going out of business. Nothing insignificant from the point of view of the business exposure. But certainly, something we need to be conscious of and watching very closely in terms of receivables. As Fares mentioned, we took some decisions to move away from certain channels in Saudi as a result of wanting to be conscious and cognizant of the exposure in there. But overall, it's not having a significant impact. In terms of the expected outflow of white collar expats, honestly, in Kuwait, I wouldn't see it being a significant issue in the short term. As I said, the consumption power is always with the Kuwaitis anyway. And that's where the majority of the population are actually purchased are in Qatar. It hasn't been a theme in the UAE. And I believe we'll probably be more cognizant of what will be the situation with the tourist industry going forward rather than worrying about the demographics within the UAE.

Thank you, Garry. And with that, we have answered every question we had, and that was the last question that came in. I think we will be concluding our call today. Thank you, everyone, for joining today's call, wherever you may be. And we look forward to seeing -- to having our next webcast to announce and discuss our third quarter earnings. Thank you, Garry. Thank you, Fares, and thank you, everyone, who joined today's call. Have a good day.