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

Hello, and good afternoon, ladies and gentlemen. This call is hosted by Mezzan Holding and is held to discuss the company's 2022 First Quarter Earnings, which were announced yesterday morning. Today is May 17, 2022, and this call is held live from Kuwait and Qatar. And the recording of the call will be available on the same link within 2 hours. My name is Fawaz Al-Sirri, I'm the moderator on the call today and allow me to introduce you to our speakers for this call. With us is Mr. Garry Walsh, the company's CEO, joining us today from Mezzan's office in Qatar; and Mr. Nabil Ben Ayed, the company's CFO, joining us today from Mezzan's office in Kuwait. Ladies and gentlemen, I will be handing over to mic to Garry in a few seconds to start the call right after I take you through our usual call format. First, the CEO and the CFO will each deliver the statements over the next 10 minutes or so, then we'll open the call to the Q&A. [Operator Instructions] 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. We will be starting the call now. Mr. Walsh, the mic is yours. Garry, you might have us on mute.

Apologies, Fawaz. And sorry, and thank you, and good morning, everyone. We'll take you through a short presentation reviewing both the tailwinds we enjoyed and headwinds we faced during Q1 2022. I will then discuss the financial highlights, after which I will hand over to Nabil who will take you through the details of the financial performance for Q1 2022. It does go without saying that in the current global context, this is a difficult time for everyone, and the uncertainty we've experienced in Q1 is likely to continue. Lastly, as Fawaz said, we'll be happy to receive your questions and answer as much as possible today. 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'll get back to you very quickly. From a tailwinds perspective, I'm pleased to report that the price increases have been implemented in KSA. We stepped up pricing in a responsible manner in KSA, and we will continue to observe and analyze the situation as further pricing and mitigating actions over the course of the year is necessary. We're continuing to progress very strongly in the KSA and UAE markets. Our revenues sharply rose by 36% and 21%, respectively. And I'm pleased to report that our KITCO salty snacks launch in Jordan is very much on track. From a headwinds perspective, cost inflation continues to rise sharply. The war in Ukraine has caused severe challenges and setbacks in global and regional economic prospects, which were already strained by COVID-related supply chain issues. Kuwait prices remain unchanged due to regulatory restraint. Price adjustment is a key theme for the first half of the year, and we are in line with price adjustments in all markets, except in Kuwait, our biggest market where our pricing remained unchanged due to the extension of COVID-related regulatory pricing caps. We hope these caps to be eased soon, which will positively impact our profitability in the future. Credit collection and payment issues in Qatar, which forced us to book an unexpected credit loss in Q1 2022. We anticipate this situation to reverse from Q3 onwards given arrangements that we have put in place. The maintenance in our KSPICO factory, we went through a series of upgrades, which have entailed rolling shutdowns in order to meet the required standards of regional GMP authorities, which we expect to complete in Q2 2022. It is anticipated that in the full year, results were closely a mirror of 2021 in this entity. In terms of our financial highlights and headline numbers for Q1 2022, our revenue reached KWD 72.5 million, down slightly from an already solid Q1 2021 revenue of KWD 73.4 million for a slight decline of 1.2%. Gross profit reached KWD 14.6 million compared to KWD 16.2 million in the comparable period for a decrease of 10.1% and the gross profit margin decreased by 200 basis points to reach 20.1%, while EBITDA reached KWD 6.2 million, down from KWD 8.7 million in the comparable period for a decrease of 28.3%. The group achieved net profit of KWD 3.1 million compared to KWD 5.6 million in Q1 2021, a decrease of 44.9%. Finally, Mezzan's net profit to shareholders of the parent company reached KWD 2.9 million for Q1 2022 compared to KWD 5 million in Q1 2021 for a decrease of 40.7%. At this point, I will hand over to Nabil to take you through the financials in more details, discussing the performance of the first quarter ended 31st of March 2022.

Thank you, Garry, for words, and thank you, everyone, for attending the call. I will walk you through the financial results as of 31st of March 2022. As for revenue contribution by businesses line at Mezzan Group Q1 2022, the food group accounted for 63.2% of total group revenue for an increase of 2.7% compared to Q1 2021, while the revenue of non-food group accounted for a balance of 36.8% of total group revenue for a decline of 7.3%. In Q1 2022, revenue of food manufacturing and distribution increased by 7.2% contributing to 49.9% of the group revenue. Revenue of food catering decreased by 7.6%, contributing to 9.4% of the group revenue. Revenue of food services decreased by 18.3%, contributing to 4% of the group revenue. Revenue of FMCG & Healthcare decreased by 8%, contributing to 34.8% of the group revenue. Revenue in Industrial segment increased by 5.6%, contributing to 2% of the group revenue. We now move on to discuss operations per geography for Q1 2022. Operations in Kuwait contributed to 75.2% of Mezzan's revenue, down by 4.8%. Revenue from our operations in the United Arab Emirates contributed to 12.3% of maintenance revenue and increased by 21.7% compared to Q1 2021 due to the improvement in our distribution businesses and launch of new products. Revenue in Qatar increased by 4.1% and contributed to 6.3% of Mezzan's revenue. Saudi Arabia accounted for 2.7% of Mezzan's revenue for an increase of 36% on the back of introduction of new brands in Saudi market. In Jordan, sales increased by 11% as we continue to improve our distribution coverage, product portfolio and KITCO's successful launch. Jordan revenue contributed to 2.7% of Mezzan's revenue, while our operations in Iraq accounted for only 0.7% of Mezzan's revenue with an increase of 2.4%. Moving on to the profit and loss. In the 3-month period ended 31st of March 2022, Mezzan Group recorded a revenue of KWD 72.5 million for a decrease of 1.2% compared to Q1 2021. The gross profit reached KWD 14.6 million compared to KWD 16.2 million in Q1 2021, and the gross profit margin reached 20.1% compared to 22.1% in Q1 2021. EBITDA reached KWD 6.2 million, down from KWD 8.7 million in Q1 2021 for a decrease of 28.3%. G&A and other expenses increased by KWD 10.7 million compared to KWD 9.8 million in Q1 2021 for an increase of 9.4%. In summary, net profit had reached KWD 3.1 million in Q1 2022, lower by 44.9% from the same period in 2021. Our net profit attributed to equity holders of the parent company reached KWD 2.9 million compared to KWD 5 million in Q1 2021 for a decrease of 40.7%. From a cash flow perspective, Mezzan recorded an operating cash flow before working capital change of KWD 7.7 million in Q1 2022 compared to KWD 9.2 million in Q1 2021, lower by KWD 1.5 million. We have recorded an outflow of working capital cash flow of KWD 2 million compared to an investment in working capital of KWD 2.6 million last year. Mezzan cash flows from operation activity, operating activities reached KWD 5.7 million in Q1 2022 compared to KWD 6.6 million in 2021. Cash flows used in investing activities raised a KWD 8 million compared to KWD 1.5 million in Q1 2021. As such, we recorded a negative cash flow before financing activity amounted to KWD 2.3 million in Q1 2022 compared to positive cash flow before financing activities of KWD 5.1 million in Q1 2021. Our net debt stood at KWD 58.2 million as of 31st of March 2022, up by KWD 5.2 million from December 2021, mainly due to KWD 1.2 million increase in bank overdraft and KWD 2.3 million decrease in cash balances. From a balance sheet perspective, as of 31st of March 2022, Mezzan's balance sheet size reached KWD 277.5 million, equity to shareholders of parent company of KWD 112.8 million and a net debt of KWD 58.2 million. Our net debt-to-EBITDA has reached 3x and is down by 0.27x compared to 31st of December 2021. And now I open the floor to your questions, and thank you.

Thank you very much, gentlemen. Thank you, Garry, and thank you, Nabil, for taking us through the quarter. We do have a series of questions coming in. Allow me a minute just to see if I can group similar questions together in the interest of your time. Garry, I have a couple of questions ready to go to you. We have 2 questions. One is from [ Nishit Lakhotia ] and the other one is from [ Imraan ], both asking about the same topic. And we think we have another one coming in also on the same topic, and that is in regards to the price caps in Kuwait and the prospect of the lifting and going forward. I'll leave that to you. And then once we answer that question, I'll come back to the other questions.

Sure. Okay. I think as most callers on the attendees on the call would be aware, when COVID started a number of trading entities engaged in price gouging. As a protection against that, the government enacted very strict protocols around price increases to prevent any price changes during the period of culprit. We would obviously hope that as COVID is winding down, and I'm pleased to say the situation in Kuwait is almost back to normal, now that as it's winding down, the government will quickly remove that restriction, which will allow price increases to flow smoothly to the market as they've done in the past, always based on proper documentation, support, logic, et cetera. I would say that from our discussions with the government, they recognize the importance of this topic, and they recognize that in the scenario we're in at the minute where some products are going through hyperinflation, that it is simply not tenable for traders to continue to import those products. We have already seen a number of our agency partners stopped shipping certain lines to Kuwait because they turn off, make money off those products anymore. For example, for one of our key lines, we can demonstrate very clearly that the prices in the UAE and in Saudi are currently 30% higher than those enjoyed by the Kuwaiti consumers. So obviously, our principles look at that and decide to shift the product elsewhere. Now from a -- we have 2 businesses, as everybody is aware, we have our own manufacturing and distribution business where we have to look sensibly ourselves and say, what can we do in the short term in terms of reducing supply, reducing promotions, reducing investment in the market and to cover the impact on our business. And then we also have partner businesses. The vast majority of our partner businesses, our contracts with the partners contain a clause, which basically says that we will only pass on -- we will only accept price where we can recover price. So at the moment, those products are in abeyance. Those issues are in abeyance. However, on items like barley, wheat, meat, packaging, we are plastic resin, we are seeing significant and enduring cost increases. Outside Kuwait, we have been successful in recovering those in Saudi. We are about 50% through the process in UAE and very comfortable that, that process is progressing well. We're in final negotiations with retailers, having got government approval where appropriate. In Qatar, we're expecting positive news momentarily. And in Kuwait, as I say, we are hopeful that the government will recognize that COVID has ended and that, as such, they can safely remove the culvert crash barriers they had put in place. I don't -- didn't see the specific questions, if I was, but I hope that, that answered them.

Thank you, Garry. Our next question is for Nabil. Nabil, we have a question from Nishit Lakhotia. Nishit is asking, there is a KWD 1.1 million provision charge in the first quarter on receivables. The question is, is it mainly due to collection issues in Qatar? And also, what do you expect in the coming quarters?

Thank you for the question. Yes, I confirm that the ECL that we had in Q1 is related to Qatar. And basically, we have a plan to recover that, hopefully, end of -- for 2022. So we are working on that. We are working on mitigating the risk and collecting back and giving -- reversing back the ECL, hopefully, by the end of 2022.

We have another question for Nabil. The question is from [ Ms. Amara Khan ]. Amara is asking the status of highest -- what's the status of higher receivables from Kuwaiti government at the time? And what is the plan for factoring those receivables?

Yes. For the Kuwaiti government has a plan, in fact, to finance the ministries to close down their debt with the market. So that plan is still in progress. And hopefully, we will benefit out of it. For the factoring, we cover, we say the -- part of the sales that we have it on a monthly basis, and this is ongoing process, of course. It helps us, of course, to mitigate the rest of the market and also to inflow the cash into our balance, let's say, on a monthly basis. Thank you.

Thank you. Let's see the questions are coming in online. We have 4 more questions coming in. Just give me a second. Okay. We have 2 questions from Ms. Amara Khan. Garry, those questions are coming to you. Her first question is on FIFA. The question is, ticket sales for FIFA were to conclude in May, what is the expected outlook compared to the results after the Arab Cup? That's my first question about FIFA expected results. And second question is what are the plans for coping with supply chain issues for commodity and commodity transportation and also the impact of agency business? So FIFA and supply chain and commodities.

Okay. Thanks, Fawaz. I noticed you always give me the easy ones, so I appreciate that. Amara, the ticket sales for FIFA, I don't believe they officially declared what the numbers are at this point. So therefore, I will be directional rather than specific. So as you will be aware, I think there's about 3.1 million tickets available for the event in Qatar. And at this point, the high likelihood is that upwards of 85%, 90% of those tickets will be sold or have already been sold, and I would expect an announcement on that momentarily. For us, obviously, there's 2 issues. So sorry, I should preface, for those 3.1 million tickets, they've had 21 million applications. Now for us as a supplier, we actually need to know in detail which events, which stadium, which attendance, et cetera, so that we can position ourselves properly. However, from memory, I think that would be an event probably in the order of 10x, if not more, the size of the Arab games. There will also be different products available during the World Cup than they were during the Arab Cup, which will also have a demonstrable effect on sales. So I would hope that FIFA will issue the official numbers shortly and the official product range shortly, which will allow us to put together a proper P&L, which I'm more than happy to ask Omar to share in a directional sense with everybody once we have it available. But suffice to say that versus the Arab games, we expect it to be substantially larger and as we operate off a fixed cost base to be substantially more successful for us. In terms of the questions you've asked on supply chain and agency, I would answer -- I think I've answered the agency piece already. So far, we are having some items withdrawn by agencies, but realistically, I think we've accepted price increases from one very small principle. So that's not really a topic of concern. From the supply chain point of view, there is definitely a challenge there. I was talking to a supplier of the state late last night, who is more than willing to provide the products, more than willing to manufacture them at the price that we've had agreed for a long period of time. However, simply can't obtain the shipping. And that's been a pattern that we are going through across the business. Where appropriate, we have increased the level of stocks that we hold of some key commodities, but we're also very fortunate in that many of our suppliers are long-standing. And therefore, they're working with us to prioritize our shipments in terms of getting the product into the market. So far, I would say we've suffered some minor disturbance, particularly on rice coming into Ramadan. And -- but bizarrely, over the long term, that will probably work out better for us as the product that was delivered midway through the Ramadan is at a substantially lower price than is currently available in the market. So I have no doubt that, that will actually positively benefit our P&L over the long term. So as I say, it's a watching brief. It varies by commodity and day by day. But we are -- our procurement team are all over, and we're trying to react as best we can as I believe is everybody else.

Thank you very much. Garry, we have a question from [indiscernible] to you, Garry. The question is, what are the products being marketed in Saudi Arabia? And where was the expansion in Saudi in the first quarter? Where was it from?

Sure. So the expansion in Saudi was really pleasing. We -- actually, on our own brands, which are obviously dear to our heart, we are continuing to make very good double-digit progress and despite a very poor February off the back of the price increases. So we had a strong January, a poor February as we push through price and then a very strong March. We've also been supported by some new products that we've introduced: Heineken 0 being one of them, 0.0 being one of them; some products from a company called ABC in Kuwait, which are not particularly consumer focused, but are performing very well for us; and a range of noodles from a company called Mie Sedaap in Indonesia, which are, again, performing very well for us. So story in Saudi is a strong performance from our core KITCO and [ Kazan ] ranges, supported by strong introductions from new partners. And from a distribution point of view, we have increased our -- the processing in Jeddah. However, in the rest of the market is -- all the volume is effectively incremental with little or no extra cost.

Thank you very much. We have no questions coming in at the moment, and we've answered the questions that we didn't get. Thank you, Garry, and thank you, Nabil, for today's call. We will now be concluding the call, and we'll see everyone at the next quarter. A quick reminder, a live recording of this call will be available on the same link you used in about 2 hours. Thank you again, everyone, and have a good day.

Thank you Fawaz.