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

Good afternoon, ladies and gentlemen. Welcome to this Mezzan Holding call. This call is held to discuss Mezzan's Q3 earnings, which were announced November 10. Today is Monday, November 14, and this call is held live from Kuwait and Doha. A recording of the slide call will be available on the same link within 2 hours or so. My name is Fawaz Al-Sirri, and I'm the moderator of this call, and allow me to introduce our speakers for the day. We have with us Mr. Garry Walsh. He's the company's CEO, and he's joining us from the company's offices in Doha. And with me here in Kuwait, Mr. Nabil Ben Ayed. He's the company's CFO, and he is joining us from the company's Kuwait office. Ladies and gentlemen, I will be handing over the 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 then the CFO will each deliver their statements over the next 10 minutes or so, and then we will open the floor for Q&A. [Operator Instructions] I would like to mention that today's call is held in 2 locations, it may take us a bit longer to address and coordinate 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 Fawaz said, we'll take you through a short presentation reviewing both the tailwinds we enjoyed and the headwinds we faced during the 9-month period ended September 30, '22. I will then discuss financial highlights, after which I'll hand over to Nabil, who will take you through the details of the financial performance for the 9-month period ended September 30, 2022. Lastly, as Fawaz said, we'd be happy to receive all your questions and answer as many as possible today. If we are 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 tailwind's perspective, I'm pleased to report that we continue to see a strong performance in our Food Manufacturing and Distribution, with both our own brands and our partner brands performing well through the period. This is supported by rising consumer demand for our products despite a reduced level of investment in our brands, which is very clear. Therefore, we have a nice underlying profit improvement in many of our businesses, and in particular, a significant improvement in our UAE on KSA operation. From a headwind's perspective, inflation pressure continued to compress margins. We have taken many active steps in terms of reducing both spends, relaunching products, changing recipes, et cetera, and we expect the good work to start showing through from Q4 2022 onwards. We did, however, experience a further delay in our Qatar collection. Therefore, we took a decision at the end of Q3 to provide for all outstanding debts from the catering customers in Qatar. We have, since the quarter end, seeing some movements. However, for the period we are talking about, everything is accrued. Within our medicine business, we have flagged that we went through a shutdown period, which was dramatically impacted on our medicine business. However, I'm pleased to confirm that as of October, that business was back running at full tilt, and we have an order book, which will take us right through to next April. So a very strong performance coming out of the shutdown there. Final thing of note is when UAE excise tax was introduced in 2017, and these are fully complied with the guidance. That's what is provided by both the tax authorities and our tax advisers. In the recent past, we have been informed that the authorities have a different view now of how that should have been implemented. And as of an abundance of caution, we have taken a full provision on that amount as we have to pass the amount over in order to be able to appeal. We are confident in our position, and we'll be pricing that aggressively. In terms of our financial highlights and headline numbers for the 9-month period ended September 30, 2022, our revenue reached KWD 194.5 million compared to KWD 191.2 million in the comparable period for an increase of 1.7%. Gross profit reached KWD 37.1 million compared to KWD 40.5 million in the comparable period for a decrease of 8.4%. Gross profit margin decreased by 210 basis points to reach 19.1%, while EBITDA reached KWD 3.1 million, down from KWD 19.6 million in the comparable period for a decrease of 84%. The group recorded a loss of KWD 6.3 million compared to a profit of KWD 10.8 million in the 9-month period of 2021, a drop of 158.3%. Finally, Mezzan recorded a loss to the shareholders of the parent of KWD 6.5 million in the 9-month period of 2022 compared to a profit of KWD 9.5 million in the comparable period for a drop of 168.4%. At this point, I will hand over to Nabil to take you through the financials in more detail, discussing the performance of the 9-month period ended September 30, 2022.

So thank you, Garry and Fawaz. And thank you, everyone, for attending the call. Let me walk you through the financial results as of September 30, 2022. As for the new contribution by business line at Mezzan Group and the 9-month period ended September 30, 2022, the food group accounted for 67.5% of total group revenue for an increase of 5.8% compared to the previous comparable period, while the revenue of the non-food group accounted for the balance of 32.5% of total group revenue for a decline of 5.7%. Within food group, revenue of Food Manufacturing and Distribution increased by 10.8%, contributing to 52% of the group revenue. Revenue of food catering decreased by 10.1%, contributing to 10.6% of the group revenue. Revenue of Food Services decreased by 4.3%, contributed to 4.9% of the group revenue, and our launch for the group revenue of FMCG & Healthcare declined by 6.8%, contributing to 30.1% of the group revenue. Revenue of industrials segment increased by 10.5%, contributing to [ 2.34% ] of group revenue. We now move on to discuss operations per geography for the 9-month period of 2022. Operations in Kuwait contributed to 71.2% of Mezzan's revenue, down by 2.1%. Revenue from our operations in the United Arab Emirates contributed to 13.6% of Mezzan's revenue for a growth of 17.5% compared to the previous comparable period due to the growth in salty snacks and energy drinks businesses. Revenue in Qatar grew by 2.9% and contributed to 7.8% of Mezzan's revenue. Saudi Arabia accounted for 2.9% of Mezzan's revenue for an increase of 36.4%. In Jordan, sales increased by 19.5% at the back of success of KITCO launch. Jordan's revenue contributed to 3.3% of the group's revenue, while our operations in Iraq accounted for only 1.1% of Mezzan's revenue with an increase of 10.6%. Moving to the profit and loss. In the 9-month period ended September 30, 2022, Mezzan Group recorded a revenue of KWD 194.5 million compared to KWD 191.2 million in the previous comparative period, an increase of 1.7%. The gross profit reached KWD 37.1 million compared with KWD 40.5 million in the previous comparable period of 2021, and gross profit margin reached 19.1% compared to 21.2% in the previous comparable period. EBITDA reached KWD 3.1 million, down from KWD 19.1 million in the comparable period for a decline of 84%. SG&A and other expenses increased to KWD 40.9 million compared to KWD 27.4 million in the previous comparable period for an increase of 49.2%. In summary, Mezzan recorded a loss of KWD 6.3 million in the 9-month period of 2022, a decline of 158.3% from the same period in 2021. The group recorded a loss attributable to equity holders of the parent company of KWD 6.5 million, compared to a profit of KWD 9.5 million in the previous comparable period for a decline of 168.4%. From a cash flow perspective, Mezzan recorded an operating cash flow before working capital change of KWD 12.1 million in the 9 months period ended September 30, 2022, compared to KWD 21.2 million in the previous comparable period, lower by KWD 9.1 million. We have recorded an outflow of working capital cash flow of KWD 4.3 million compared to an investment in working capital of KWD 3.5 million last year. Mezzan's cash flow from operating activities reached KWD 7.7 million in the 9-month period of 2022 compared to KWD 70.8 million in the previous comparable period. Cash flows used in investing activities reached KWD 8.9 million in the 9-month period of 2022, compared to KWD 8.3 million in the previous comparable period. As such, we recorded a negative cash flow before financing activities amounting to KWD 1.2 million in the 9 months period of 2022, compared to a positive cash flow before financing activity of KWD 9.5 million in the previous comparable period. Our net debt stood at KWD 65.1 million as per for September 30, 2022, up by KWD 12.1 million from September 2021, mainly due to clearly KWD 8.9 million increase in capital investment and KWD 4.9 million decrease in cash [indiscernible]. From a balance sheet perspective, as of September 30, 2022, Mezzan's balance size reached KWD 264.8 million attributable to shareholders of parent company of KWD 106.5 million at a net debt of KWD 65.1 million. Our net debt to EBITDA has reached 4.1x and is up by 1.9x compared to September 30, 2021. And now I open the floor to your questions, and thank you.

Thank you, Garry, and thank you, Nabil. We will now be taking in our audience's questions. We have a couple that we've received so far. The first one is from [ Rajat ] from [ NBK Capital ]. [ Rajat ] has a series of questions. So I'll just ask them one by one. So Garry, I'm going to ask you a question. You give me an answer, and then I'm going to ask you the follow-up question. So [ Rajat's ] first question is -- and this is for Garry, can you please give us some background and talk us through the provision you took in Qatar. And what are the chances of collecting it? By when and how much?

Okay. Thank you for the question, [ Rajat ]. Very clear. And as many of you will be aware, we have a very strong catering business in Qatar. That business has a mix of both government contracts and private contracts and is currently getting ready to provide the full World Cup -- catering services for the World Cup. And the government business continues to trade well. The private business was very tied to the construction sector. As the construction slowed down in Qatar, the government decided to implement a very stringent audit process, which has meant that many of our customers have not got paid. I mean not getting paid and have not yet been able to pay us. We are assured that this situation will correct itself. Both of the major companies involved are substantial companies with substantial assets. We have taken legal steps to protect ourselves. However, out of an abundance of caution, we have taken a full provision on the amount rather than let us continue to cloud the good underlying performances within the business. And as to the question of whether we expect it to get it back, yes, we would hope that we would get it back in due course.

Thank you, Garry. [ Rajat's ] second question is, can you please comment on the catering opportunity for FIFA World Cup? How should we think about this impact on Q4 revenue?

[ Rajat ], we should see it as turnover enhancing, profit enhancing and cash flow enhancing. We have invested substantially in equipment, bringing people, accommodations, everything to be ready for the next 6 weeks. Obviously, we take our turnover from direct sales to consumers on this project. So we would hope to see it being very cash flow enhancing and subject to the people turning up in the numbers that we expect them to. We would certainly expect it to be very enhancing on the bottom line and on the top line.

Thank you. [ Rajat's ] third question is, do you have any comments on whether you would be able to pass any of the cost increase seen recently?

[ Rajat ], yes. [ Rajat, ] that takes us back to the comment on ECL clouding a lot of the good performance within our business. So we have 2 basic business models, one is where we manufacture and distribute on behalf of ourselves and one is where we represent a third-party brand. On the third-party brand, we have been very, very, very resistant to taking any price increases that we could not in fact pass on. And on our own brands, we have worked assiduously over the last few months to try and get to a position where we have recovered through whatever way the increases we're facing, whether that's a reduction in investment in customer terms, a reduction in investment and promotions, a reduction in investments in marketing, value-enhancing MPD or any other mechanism you can think of. I'm pleased to report that in October, for example, all of our country's food businesses performed ahead of last year at a bottom line perspective. So yes, I do believe it's possible, albeit there's a significant struggle to continue to do that.

Thank you, Garry. We have a question from [ Talal ]. [ Talal ] is asking, can you please explain why is there a huge growth in the Saudi market for Mezzan? Is it from commercial or industrial?

I'm not sure what [ Talal ] means by commercial or industrial. The growth is predominantly within our Food Manufacturing and Distribution business in Saudi. It's driven by a mix of our own and third-party brand, and we believe that it is a sustainable growth into the future.

Thank you. We have a question from [ Nishit ]. [ Nishit ] is asking, how are you protecting yourself from any receivables and collection issue for FIFA given your experience in collection risks? Garry, would you like to take that or would Nabil take that?

Nabil might as well take that. But it sounds very easy. So we'll leave it to him.

All right. Thank you, Garry, for that. So [ Nishit ], basically, the FIFA contract is working on a cash basis. And we are selling the food in the stadiums. So whoever is coming to the counter, he has to pay for ordering. So that's on a cash basis. We don't expect, honestly, any serious and any problem with the people coming from FIFA.

[Operator Instructions] Next up, we have a question from [ Hamid ]. [ Hamid ] is asking, do you have any visibility on price increases in Kuwait given that the parliament has reshuffled? Garry?

[ Hamid ], unfortunately not. I think if you have any insight to share, we welcome hearing it. At this stage, the legal restriction on price increase remains in place. And as you can see in our numbers, it's causing us significant pain. However, we are trying to manage our way through it as best we can and have to hope that over the coming period, commonsense breaks out. We are starting to see some of our partner agencies refuse to supply, and I don't think we are the only people in that position. So I'm hoping that over the next while, cooler heads will prevail, and we'll see some easing of the restrictions.

Thank you, Garry. Just give us a moment. We have a question from Mr. [ Talal ][indiscernible]. [ Talal ] is asking, please explain the pharma decline. Is it a loss of market or contract? Garry?

[ Talal ], we mentioned on previous calls that we had taken a decision to refurbish our KSPICO factory, the one we acquired a couple of years ago, to bring it to higher standards. And that meant effectively that we could not manufacture during that period. And we focused on the most profitable contracts we had. However, the volume was just not sufficient to cover the ongoing cost. I'm pleased to report that as of the start of September, that factory went back into production. And that as a result, we had a good February -- or a good September and a very strong October. As I mentioned earlier, we have a very strong order book, which we believe will give us strong results out of that business right through to the end of April. So it was a purely internal focused decision to set that business up for the long term correctly and nothing to worry about in the long term, if that would set us up for a much stronger growth on a go-forward basis.

Thank you. We're taking a look through the questions. We have one question left so far. [Operator Instructions] We have a question -- we have a follow-up question from [ Talal ]. [ Talal ] is asking, how many SKUs are you producing and selling in Saudi Arabia? What is the near-term outlook on these products? And are there any local competitors? Garry, that question is for you.

Okay. Thank you, Fawaz. Thank you, [ Talal ]. Our portfolio in Saudi, from memory, totaled about 120 SKUs. And of those, about 20 are manufactured locally. And as we will expand production in Q1 next year to move our production of our Mexita snacks into Saudi from Kuwait. So going forward, all of the Mexita products will be provided to the various markets from Saudi. The business is growing rapidly. We do believe that it is sustainable, both in the near and short term. And in terms of local competitors, our biggest local competitor would be Lays or Batal, both of whom manufacture and in substantially bigger facilities than we do in Saudi, and that's something we'll keep under advisement as we continue to grow. I hope that answers the question.

We have a question from [ Rajat ]. [ Rajat ] is asking, what should we expect in terms of revenue growth in 2023 and 2024? What do you think the key drivers will be?

Is that to me or Nabil, Fawaz?

Yes. That is for you, sir.

Okay. [ Rajat ], we're currently at the end of our year. We're going through our budgeting process at the minute. And at the end of that budgeting process, we will share our top line expectations, both top line and bottom line for next year. At this point, I would only be guessing. We obviously need to do a lot of thinking still about the inflation side of it and make sure that we are covering that successfully on a go-forward basis.

Thank you, Garry, for taking that on. We're waiting for more questions. I think we might have one in the pipeline. No, we don't. So we're going to hang tight here and wait to receive more questions. I would like to emphasize that we're still online. We have the CEO, Mr. Garry Walsh; and the CFO, Mr. Nabil Ben Ayed. And they're here ready to take on your questions and answering them. Thank you for waiting, and apologies for the dead air. But we wanted to be available to answer any questions. I think with that, we will be concluding today's call. Thank you, everyone, for joining us. Thank you, Garry Walsh, and thank you, Nabil Ben Ayed, for joining us today as well, and we look forward to meeting everyone in the next quarter. Thank you, and have a good day.

Thank you all.