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

Hello and welcome, ladies and gentlemen. This call is held to discuss Mezzan Holdings Q4 and full year earnings, which we announced yesterday. Today is Monday, March 22, and this call is held live from Kuwait and Dubai. And the recording of this call will be available on the same link within 2 hours. My name is Fawaz Al-Sirri, and I'm the moderator on today's call. And I'm joined with today's speakers: from Dubai, Mr. Garry Walsh, the company's CEO. And in Kuwait, Mr. Nabil Ben Ayed, the company's CFO. A very warm welcome to everyone, and we hope that you and your colleagues and your families are safe in this tough and challenging time. Ladies and gentlemen, I will be handing over the mic to Garry in a few seconds to start the call. But before that, let me just take you through the format of today's call. For the first -- for the next 10 to 15 minutes, the CEO and CFO will each deliver their statements, after which we'll have a Q&A session. [Operator Instructions] I would like to mention that given current circumstances, we're currently practicing social distancing. And as such, we're working remotely from multiple locations as I said earlier. So it may take us longer to address some 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, the mic is yours.

Thank you, Fawaz, and thank you, everybody, for joining us. And this afternoon, we will take you through a short presentation, reviewing both the tailwinds we enjoyed and the headwinds we faced during 2020. I will then discuss financial highlights, after which I will hand over to Nabil, who will take you through the details of the financial performance. For those of you who have not met Nabil, he has been promoted internally from Finance Director following the departure or Fares Hammami NBK Capital. I would like to take this opportunity to wish them both well in their new roles and thank them both for their contribution to today's results. Lastly, we will be happy to receive your questions and answer as much as possible today. Due to the shorter time than usual, if we were unable to cover all your questions, please feel free to send your questions to our Investor Relations team at [email protected], and we will get back to you. From a tailwinds perspective, I'm glad to say that during 2020, we have witnessed improvement in our operational performance, driven by both the heritage portfolio, inorganic growth as well as opportunistic COVID-related businesses. We witnessed healthy top line growth in all core consumer-driven business units. I would like to highlight strong performance in the food manufacturing and distribution as well as the FMCG & Healthcare segments. It is worthy to note here that the growth in top line witnessed throughout the year and continued in Q4 was coupled with operating leverage and economies of scale, which led to the expansion of various profitability margins, including gross profit, EBITDA, operating profit and net margins. Since the beginning of 2020, we also witnessed an improvement in working capital cycle, which enabled us to reduce our borrowings and financing costs. Our net debt in 2020 was lower by 28% compared to the net debt of 2019. And we are pleased to see that our net debt to net debt-to-EBITDA are back to pre-acquisition levels. From a headwind perspective, we witnessed a diminishing trend of supply chain disruptions, which have improved throughout the year from earlier months of 2020. We continue to see select market channels closed, such as schools, amongst others, and we continue to witness slow recovery of food services segments, which vary from one market to the other. COVID-related one-off costs, including staff relocation costs. Our operations in Afghanistan was impacted by the reduction of U.S. troops. As a result, our services segment in Afghanistan dropped compared to 2019. Lastly, our catering business in Qatar declined in 2020 due to COVID-related interruptions. As for financial performance in Q4, I'm happy to report that Mezzan recorded improved operation and financial results from 2019, as evidenced by enhancement in key operational metrics, including revenue, gross profit, gross profit margins, EBITDA and EBITDA margin as well as net income and net income to shareholders of the parent company. Our 2020 performance is testimony to our dynamic business model and strategy as well as our ability to adopt promptly to the adverse operation conditions that the pandemic imposed on us. In terms of our financial highlights and headline numbers for year-to-date Q4 ended 30 December 2020, Mezzan's revenue reached KWD 246.4 million, up from KWD 222.5 million in the previous comparable period, for a growth of 10.8%. Gross profit reached KWD 59.3 million, compared to KD 48.7 million in the comparable period, for an increase of 21.7%. Gross profit margin enhanced by 220 basis points to reach 24.1%, while EBITDA reached KWD 25.4 million, up from KWD 18.5 million in the previous year, for an increase of 36.9%. And EBITDA margin increased by circa 200 basis points to reach 10.3%. The group achieved net profit of KWD 12.6 million during the 12 months of 2020, compared to KWD 6.3 million in the 12 months of the prior year, an increase of 98.7%. And gross profit margin increased by -- sorry, of 98.7%. Finally, Mezzan's net profit to shareholders of the parent company reached KWD 10.9 million during 2020 and compared to KWD 5.6 million during the comparable period, for an increase of 93.9%. Key to note that our EBITDA has increased by circa 371% in Q4 alone compared to the prior year levels to reach a record level of KWD 4 million. Finally, before handing over to Nabil, I would like to draw your attention to our innovative approach to dividends this year. We have been clear that Mezzan is not an investment or a real estate company, but rather a pure trading company. We stepped in to support our shares when we felt they were undervalued. But now that they are trading close to our book value, we believe it is appropriate to return them to shareholders, rather than take the gain ourselves as our performance continues to improve. This has no impact on our issued shares or cash flow and reflects our confidence in the long-term value of our shares and our business model. At this point, I will hand over to Nabil to take you through the financials in more detail discussing the performance of Q4 2020.

Thank you, Garry. Thank you. Thank you for everyone for attending the call. Now let me walk you through 2020 results. So as of revenue contribution by business line at Mezzan Group, the food group accounted for 67.2% of the total group revenue year-to-date 2020, for a growth of 3.2% compared to 2019, while the revenue of non-food group accounted for a balance of 32.8% of total group revenue, for a growth of 30.4%. In year-to-date 2020, the food manufacturing and distribution revenue increased by 6.8%, contributing to 46.6% of the total group revenue. The food catering revenue decreased by 5.9%, contributing to 13.6% of the group revenue. The food service revenue decreased by 0.8%, contributing to 7% of the group revenue. FMCG & Healthcare revenue increased by 34.1% contributing 31% of the group revenue. The industrials segment revenue decreased by 11.5%, contributing to 1.8% of the group revenue. We now move to discuss the operation per geography. For the year 2020, our operations in Kuwait contributed to 73.1% of Mezzan's revenue, up by 16.7%, resulting from a strong performance from food, manufacturing and distribution and non-food FMCG and health care business alike. Revenue from our operations in the United Arab Emirates increased by 2.1% compared to 2019 due to an improvement in our light snacks businesses. Revenue in Qatar decreased by 12.1% year-to-date '20 compared to year-to-date 2019, now contributing to 8.1% of Mezzan's revenue. The drop is due to the catering business impacted by COVID. For Saudi Arabia, accounted 2% of Mezzan's revenue in year-to-date 2020, for an increase of 7% compared to year-to-date 2019. In Jordan, sales increased by 14.4% as we have seen an improvement in our fresh foods and vegetables businesses. And that market contributed to 2.6% of Mezzan's revenue. Revenue from operations in Afghanistan was down by 16.7% during 2020 due to the reduction of troops. Organic and market accounts for 2.3% of Mezzan's revenue. While our operations in Iraq accounted 1% of Mezzan's revenue with an increase of 17.7% compared to 2019. Moving to the profit and loss. We will first discuss year-to-date 2020 then Q4 2020. For year-to-date 2020, Mezzan Group recorded a revenue of KWD 246.4 million, for an increase of 10.8% compared to year-to-date 2019. As explained before, this was driven by top line growth, both food and non-food segment alike, as well as organically and inorganically. Gross profit reached KWD 59.3 million in year-to-date Q4 2020 compared to KWD 48.7 million in the previous comparable period. And the gross profit margin reached 24.1%, an enhancement of approximately 2.2%. Selling, general and administrative expenses increased by 70% year-to-date 2020, mostly on the back of new businesses and acquisitions in addition to provisions. EBITDA reached KWD 35.4 million, up from KWD 18.5 million in previous years, for an increase of 36.9%. This is important in light of the increase in production capacities and efficiency-enhancing initiatives we completed recently as well inorganic growth and CapEx we have completed over the past 3 years. Financing costs and other expenses decreased to KWD 3.8 million in year-to-date 2020 compared to KWD 6.1 million in year-to-date 2019. In summary, net profit had reached KWD 12.6 million in year-to-date 2020, ending 31st of December, higher by 98.7% from comparable period in 2019. Our net profit attributable to equity holders of the parent company reached KWD 10.9 million on year-to-date 2020 compared to KWD 5.6 million in the comparable period 2019, for an increase of 93.9%. Moving to the profit as for Q4 2020. Mezzan Group recorded a revenue of KWD 52 million for a decrease of 1.2% compared to Q4 2019, mainly due to Mezzan's food service and an catering segment. Gross profit has reached KWD 12.3 million in Q4 2020, compared to KWD 10 million in the previous comparable period. And our gross profit margin reached 23.5%, an enhancement of approximately 4.5%. Selling, general and administrative expenses increased by 3.6% in Q4, mostly on the back of provisions posted during the quarter. EBITDA reached KWD 4 million, up from KWD 0.8 million in previous year, for an increase of 378.1%. Financing costs and other expenses decreased to KWD 1.3 million in Q4 2020, compared to KWD 3.5 million in Q4 2019. Net profit for Q4 2020 reached KWD 0.7 million, higher by 137.7% from comparable period in 2019. Net profit attributable to equity holders of the parent company reached KWD 0.65 million in Q4 '20 compared to a loss of KWD 3.5 million in the same period of 2019, for an increase of 118.9%. From a cash flow perspective, we then had recorded an operating cash flow before working capital changes of KWD 30.7 million in year-to-date 2020, up by KWD 8.4 million from previous year on the back of larger activity. In year-to-date 2020, we have recorded an inflow of KWD 6.6 million as working capital cash flow compared to an investment in working capital of KWD 11.4 million in 2019 on the back of enhanced working capital management. Key to note here that Mezzan's cash flow from operations activity reached KWD 37.3 million in year-to-date 2020 compared to KWD 10.9 million in FY 2019, which is an important milestone for Mezzan Group. Cash flows used in investing activities reached KWD 6 million, mostly only back on maintenance capital expenditure. As such, we recorded a positive cash flow before financing activity amounted to KWD 31.3 million in year-to-date 2020 compared to minus KWD 17.9 million year-to-date 2019. Our net debt stood at KWD 53.3 million in year-to-date 2020, down by KWD 20.9 million from 2019 levels. As of 31st of December 2020, Mezzan's business balance sheet size reached KWD 253 million. Our equity to shareholders of current company reached KWD 109 million. A note on Mezzan's borrowings, we are pleased to see our debt levels going down to reach KWD 53.5 million in December 2020, which is lower by KWD 20.9 million from December 2019 levels. Our net debt-to-EBITDA has reached 2.1% and is now at pre-acquisition levels. On that, I thank you, and I'll pass it to Fawaz.

Thank you, Nabil. And thank you, Garry, for taking us through the year and the quarter. We will now be taking in our audience's question.

Let me see what we have on screen. We currently don't have any questions coming in. We will wait until we start getting questions for about 2 minutes or so. So this silence is us waiting. And I'm going to stay silent and we start getting questions. If we don't get questions, we will be concluding today's call. Thank you. The questions are beginning to come in. The question is from Nishit , Nishit is asking how much was COVID support from government in fiscal year '21 in terms of salaries for Kuwait employees. Nabil?

Thank you for the question. I will say, unfortunately, we don't disclose that. But what I can say, yes, the group had received support from the government. But on the other hand, we had costs to cover for the -- I mean, the COVID-19 reality has imposed displacement of our workers from one site to another one. So that has and had generated costs for the company. So on one hand, we have support from the government. At the other hand, we had to also

Thanks. Next up, we have a question on CapEx. Question is from Nishit as well, which is -- do you have any CapEx guidance for the year '21? Nabil?

Yes, we are planning to have a CapEx for about KWD 15 million for next year. This will support our activity, and it contains also the maintenance CapEx, which is mandatory for us to maintain our performance levels in

The next question is for Garry. It's from Talal Talal is asking, the Ministry of Commerce Industry, Kuwait has expended or restricted the marketing festival due to COVID in 2020. Was it the main reason affecting the profit margin positively? Garry? Garry, are you with us? You might have muted your speaker or your mic.

Sorry, Fawaz. I had. You're correct. The -- sorry, the -- in terms of the question, it didn't impact our margins substantially. As you're aware, a lot of our business is agency business. And the vast majority of our agency principles actually cover our promotional and marketing spend. So for example, in the case of and where they wouldn't have needed to spend in Kuwait in 2020 to drive their top line number, we wouldn't have seen a benefit of that in terms of marketing or promotional savings. Within our own brands, the vast majority of the improvement was driven by improving the amount of throughput through the factory.

Thank you. Thank you very much. The next question is from who is also from and he's asking, what is the margin improvement in 2020? Is it sustainable? And should we expect further improvement in '21? Or these levels are more sustainable. Garry, question is for you.

Sorry, Fawaz. I missed the first part of the question.

The sustainability of -- the profitability levels that we have seen in 2020, should we expect a further improvement in '21? Is it sustainable?

Yes. So I mean, from a net profit level, we obviously have a lot of moving parts in our business at the minute. No secrets, we had some -- we were very clear on the fact that we had some COVID and that business come through in our catering business in Kuwait last year, which was very helpful. And we hope and pray that, that won't happen again this year, for obvious reasons. And also, we have our services business really being impacted by the troop withdrawals both in Afghanistan and Iraq. So we have some negative headwinds going into this year. As against that, we continue to see a very strong performance from our recent acquisitions in the medical space, and we continue to see a very strong performance from our food manufacturing and distribution businesses. So in the round, we expect to finish 2021 slightly ahead of 2020. probably in the low mid-single digits kind of range at this point. We'll obviously guide further as we go through the year. But at this point, we'd be confident that we can cope with the headwinds, albeit this year comes with a health warning in terms of vaccination programs, will the consumers travel after the vaccination programs, will the schools reopen on time and what will the Americans do in terms of troop numbers eventually. So there's a number of moving parts. But at this point, we remain confident that we can continue to drive growth through this year and then accelerating out as we go into next year.

Thank you very much, Garry. That's the last question we received. We -- and that question was received a couple of minutes ago. I think, with that, we'll be concluding today's call. I'd like to thank everyone for joining us today and staying with us during the Q&A session. Like I said at the beginning of the call, a live recording of this call is going to be available on this very same link you used in about 2 hours or so. Thank you all for joining us, and we look forward to you in the next call for the first quarter in the next several weeks. Thank you. Have a good day.

Thanks, guys. Bye.