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

Good afternoon, ladies and gentlemen. This call is held to discuss Mezzan Holding Q2 Earnings, which were announced yesterday, August 14. Today is Monday, August 15, 2022, and this call is being held live from Kuwait and Dubai. A recording of the live call will be available on the same link within 2 hours. My name is Fawaz Al-Sirri, I'm the moderator on today's call, and allow me to introduce our speakers. We have with us Mr. Gary Walsh, he is the company's CEO, and he is joining us from the company's offices in Dubai. And with me here in Kuwait is Mr. Nabil Ben Ayed, he's the company's CFO, and he is joining us in the company's Kuwait office. Ladies and gentlemen, I'll be handing over the mic to Gary in a few seconds to start the call right after I take you through our usual call format. First, the CEO and CFO will each deliver their statements over the next 10 minutes or so, then we'll open the floor for Q&A. [Operator Instructions]. I would like to mention that since today's call is held in 2 locations, it may take us a bit longer to address your 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.

Good afternoon, everyone. Thank you, Fawaz. As usual, we will take you through a short presentation reviewing both the tailwinds we enjoyed and the headwinds we faced during half 1 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 H1 2022. Lastly, as Fawaz said, we will 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 will get back to you very quickly. From a tailwinds' perspective, we're pleased to say that our Saudi, UAE and Qatar Foods segment continue to improve their trading profile rapidly. Our Kuwait demand is holding up well despite significantly -- sorry, Kuwait demand for consumer staples is holding up well despite significantly reduced support for the brands. And our Jordan KITCO salty snacks launch remains well on track. From a headwinds' perspective, inflation continued to cause uncertainty around supply and pricing, which continues to be a strain on the overall business as well as the strain on our performance. The receivables, we have an issue from good long-term customers, predominantly in Qatar in short-term difficulties. We highlighted that in Q1, where we expected it to reverse in Q2, and so far, it has not reversed, which has again put stress on our numbers in Q2. We continue to see staff churn as the great resignation makes its way to this part of the world. And our medical manufacturing facility was being updated in half 1 as we explained in Q1. And we expect to see that now build rapidly as we go through the second half of the year. And I'm pleased to report that we were notified today that we had passed all the appropriate inspections required. In terms of our financial highlights and headline numbers for half 1 2022, our revenue reached KWD 134 million, which is unchanged compared to our half 1 2021 levels. Our gross profits reached KWD 25.6 million compared to KWD 29.5 million in the comparable period for a decrease of 13.1%. Gross profit margin decreased by 290 basis points to reach 19.1%. While EBITDA reached KWD 8.3 million, down from KWD 14.3 million in the comparable period for a decrease of 42.3%. The group achieved net profit of KWD 2 million compared to KWD 8.3 million in half 1 2021, a decrease of 75.6%. Finally, Mezzan's net profit to shareholders of the parent company reached KWD 1.9 million for half 1 2022 compared to KWD 7.2 million in half 1 2021 for a decrease of 73.9%. At this point, I will hand over to Nabil to take you through the financials in more details, discussing the performance of half 1 ended June 30, 2022.

Yes. So thank you, Gary. Thank you, Fawaz, and thank you, everyone, for attending the call. Let me walk you through the financial results of 30th of June 2022. As for the revenue contribution by business line at Mezzan Group, in H1 2022, the Food group accounted for 66% of total group revenue for an increase of 3.9% compared to H1 2021, while the revenue of Non-Food group accounted for the balance of 34% of total group revenue for a decline of 6.9%. In H1 2022, revenue of Food Manufacturing & Distribution increased by 9.6% contributing to 51.6% of the group revenue. Revenue of Food Catering decreased by 13.3%, contributing to 9.8% of the group revenue. Revenue of Food Services decreased by 10.9% contributing to 4.5% of the group revenue. Revenue of FMCG & Healthcare decreased by 8.1%, contributing to 31.5% of the group revenue. Revenue of Industrials segment increased by 13.3%, contributing to 2.3% of the group revenue. We now move on to discuss operating per geography for H1 2021 -- 2022. So operations in Kuwait contributed to 72.8% of Mezzan's revenue, down by 3.8%. Our revenue from operations in the United Arab Emirates contributed to 13.3% of Mezzan's revenue, increased by 21.6% compared to H1 2021 due to the growth in salty snacks and energy drinks businesses. Revenue in Qatar decreased by 1.9% and contributes to 7% of Mezzan's revenue. Saudi Arabia accounted for 2.8% of Mezzan's revenue for an increase of 38% on the back of production of new brands in the Saudi market. In Jordan, sales increased by 16.7% as we continue to improve our distribution coverage, product portfolio and KITCO salty snacks' successful launch. Jordan revenue contributed to 3.1% of Mezzan's revenue. While our operations in Iraq accounted for only 1% of Mezzan's revenue with an increase of 5.3%. Moving to the profit and loss. In the 6 months period ended 30th of June 2022, Mezzan Group recorded a revenue of KWD 134 million, which remains flat and unchanged compared to H1 2021. Gross profit reached KWD 25.6 million compared to KWD 29.5 million in H1 2021 and the gross profit margin reached 19.1% compared to 22% in H1 2021. Our EBITDA, we issued KWD 8.3 million, down from KWD 14.3 million in H1 2021 for a decrease of 42.3%. SG&A and other expenses increased by KWD 22 million compared to KWD 19.5 million in H1 2021 for an increase of 12.7%. In summary, our net profit has reached KWD 2 million in H1 2022, lower by 75.6% for the same period in 2021. Our net profit attributable to the equity holders of the parent company reached KWD 1.9 million compared to KWD 7.2 million in H1 2021 for a decrease of 73.9%. From a cash flow perspective, Mezzan recorded an operating cash flow before working capital change of KWD 12.1 million in H1 2022 compared to KWD 15.4 million in 2021, lower by KWD 3.3 million. We have recorded an outflow of working capital cash flow of KWD 9.8 million compared to an investment in working capital of KWD 2.3 million last year. Mezzan's cash flows from operating activities reached KWD 2.3 million in H1 2022 compared to KWD 13.1 million in H1 2021. Our cash flows used in investment activity reached KWD 8 million compared to KWD 2.9 million in H1 2021. As such, we recorded a negative cash flow before financing activity accounted to KWD 5.6 million in H1 2022 compared to a positive cash flow before financing activities in KWD 10.2 million in H1 2021. Our net debt stood at KWD 67.7 million on 30th of June 2022, up by KWD 16.7 million from June -- compared to June 2021, mainly due to KWD 5.1 million increase in capital investment and KWD 11.6 million decrease in the cash flow balances. From a balance sheet perspective, as of 30th of June 2022, Mezzan's balance sheet size reached KWD 268.5 million, equity to shareholders of parent company KWD 114.9 million, and our net debt KWD 67.7 million. Our net debt-to-EBITDA has reached 4.3x and is up by 2.2x compared to 30th of June 2021. And now I open the floor to your questions, and thank you.

Thank you, Nabil, and thank you, Gary. We will now be taking in our participant questions. We already have 2 questions that came through. The question is asked from Mr. [ Yousef Abdul Razzak ], and the questions are for Gary. Gary, [ Yousef ] is asking 2 questions. The first question is gross margins fell to 18% during the quarter. Are we expecting further pressures during the remaining year? And his second question is, what is the latest update with regards to raising unit prices in Kuwait? Over to you, Gary.

I think [ Yousef ], in terms of your question and in terms of the gross margins hitting 18%, I think most of our major commodities at this stage, we're comfortable that we've hit the bottom of the market. And so we wouldn't expect it to get much worse in the second half of the year. In terms of the latest update with regards to raising unit prices, in Kuwait specifically, I think, as you know, that has proved very difficult from a legislative perspective. And we don't have any anticipation of that changing over the next few months. And that said, we as a management team are looking at what we can do in terms of addressing it in other ways through accelerated product launches, through cutting our costs and anything else we can think of to try and offset the gross margin fall. On the positive side, I do believe that there are ways to it that aren't just about price.

Thank you, Gary. We're waiting to get to receive more questions. We don't have any more questions, but we will stay on the line in case there are any questions that are going to be coming through. Gary, we have a follow-up question from [ Yousef ]. [ Yousef ] is asking, can you tell us why the catering business is unprofitable at the moment.

Sure, I think as we highlighted in the Q1 call and again today, we have a receivables issue. And that predominantly centers around our catering business, which required us to take a significant ECL, which weighed on our numbers in Q1 and in Q2. As I said in my comments upfront, those are in relation to good, long-standing customers who are going through structural cash flow issues at the minute. And we believe that, that will be resolved, and we will be able to release those ECLs in the fullness of time...

Another follow-up from [ Yousef ]. He is asking, are there any growth catalysts for the pharma business.

I think in the longer term, [ Yousef ], we have made it very clear that we will invest in expanding the [indiscernible] business, which we acquired as part of the KSPICO business. We would expect to see that starting to hit the road next year, but not impacting on our numbers for probably 3 years after that, and we'll explain that more fully nearer the time. In terms of KSPICO itself, I'm very happy to report that following the rejuvenation of the facility, which has gone on over the last 9 months, that we have a significant order book, which will cover us out with very good growth through until the end of 2023. And obviously, we have invested in an R&D facility as part of KSPICO, which we would hope would continue to bring products on stream as we move forward.

We have a question from [ Anas Masri ]. This question is for Nabil. The question asks, for ESL section, there is a KWD 2.5 million charge for the period. What does this huge amount include and the company's position on the collectibility of this amount? Nabil?

Thank you [ Anas ] for the question. As we had previously shown in the presentation, this is mainly related to Qatar collection. As mentioned by Gary, we are -- we were estimating that this will be collected in Q2. Unfortunately, this didn't happen. So we are looking forward and hoping that the position will change during Q3 or late Q4 2022. So hopefully, things will be better before the end of this year.

Thank you, Nabil. We've answered every question we've received. We will wait for another minute to see if you have any more questions coming in. If not, we will be concluding the call. For now, we'll wait for your questions. Hello again. We've answered all the questions that we have received so far. Ladies and gentlemen, thank you for your time today. Thank you for joining us. And thank you, Gary, and thank you, Nabil, for taking us through the year. And we'll see everyone at the next call. Thank you again, and have a good day.

Thank you.