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's Q1 Earnings, which were announced earlier today, May 8. This call is held live from Kuwait and Dubai, and the recording of this live call will be available on the same link within about 2 hours. My name is Fawaz Al-Sirri. I am the moderator on the call today. And allow me to introduce our speakers. We have with us Mr. Garry Walsh. He's the company's CEO, and he's joining us from the company's offices in Dubai; as well we have with us Mr. Nabil Ben Ayed, and he is the company's CFO, and he is joining us from the company's Kuwait offices. 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 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 today's call is held in 2 locations, and 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. And 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 3-month period ended 31st of March 2023. 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. Lastly, as Fawaz said, we will be happy to receive all your questions and answer as much 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'll get back to you as soon as humanly possible. So in terms of our tailwinds, firstly, we had a much more effective credit collection and management to receive, once those of you who followed us last year, we'll have seen that we struggled in that area, and I'm pleased to say that Q1 showed a marked improvement as did Q4. We've managed to get new products away, allowing Mezzan to capitalize on market opportunities and focus on categories where we have been able to position at the higher end of the market, which has really helped our gross margins as we'll come on to later on. And KITCO in Jordan continues to improve its performance and gained a more substantial presence in the markets. Again, Nabil who will take you through that shortly. From a headwinds perspective, we continue to be challenged by inflation. And whilst there is some easing up in the logistics costs, overall inflation is still an issue. And as those of you on the call are aware, Kuwait has still got an embargo in place against any price increases. This is continuing to cause us difficulty which we are countering by managing our costs very assiduously. That's the price caps. And finally, that's leading to staff turnover as we focus on managing our costs. Obviously, one of our key costs is staff, and we will see people leaving as they're able to obtain higher salaries in other areas. So where did we finish up? From a revenue perspective, in Q1 2023, we finished at KWD 79 million compared to KWD 72.5 million in the corresponding period of 2022 for a growth of 8.9%. Gross profit reached KWD 16.5 million compared to KWD 14.6 million in the corresponding period of 2022, and gross profit margin reached 20.9% compared to 20.1% in the previous comparable period. EBITDA reached KWD 8.3 million, up from KWD 6.2 million in the previous comparable period of 2022 for an increase of 33.8%. SG&A and other expenses reached KWD 10.3 million compared to KWD 10.7 million in the previous comparable period for an increase of 3.3%. In summary, Mezzan recorded a profit of KWD 4.6 million in the 3-month period of 2023, an increase of 49.9% from the same period in 2022. The group recorded a profit attributable to equity holders of the parent company of KWD 4.3 million compared to a profit of KWD 2.9 million in the corresponding period of 2022 for an increase of 45.1%. From a cash flow perspective, Mezzan recorded operating cash flow before working capital changes of KWD 8.8 million, in the 3-month period ended 31st March 2023 compared to KWD 7.7 million in the corresponding period of 2022, lower by KWD 1.1 million. I'll now hand over to Nabil to go through more detail.

Thank you, Garry and Fawaz. Thank you, everyone, for attending the call. Let me walk you through the financial results as of March 31, 2023. As for revenue contribution by business line at Mezzan Group, in the 3 months period ended March 31, 2023, the Food Group accounted for 62% of total group revenue, for an increase of 7% year-on-year. While revenue of Non-Food Group accounted for the balance of 38% of total group revenue, for an increase of 12.2% year-on-year. Within Food Group, revenue of food manufacturing and distribution increased by 11.2%, contributing to 51% of group revenue. Revenue of food catering decreased by 19.1%, contributing to 7% of group revenue. Revenue of food services grew by 15.2%, contributing to 4% of the group revenue. In our Non-Food Group revenue of FMCG and Healthcare, increased by 11.4%, contributing to 35% of the group revenue. Revenue of Industrials segment grew by 25.2%, contributing to 2% of the group revenue. We now move on to discuss operations per geography for the 3-month period of 2023. Operations in Kuwait contributed to 75.4% of Mezzan's revenue, up by 9.4%. Revenue from our operations in the United Arab Emirates contributed to 11% of Mezzan's revenue, for a slight decline of 0.5%. Revenue in Qatar grew by 16.3% and contributed to 6.8% of Mezzan's revenue. Saudi Arabia accounted for 2.6% of Mezzan's revenue, for an increase of 3.7%. In Jordan, sales increased by 25.1%. Jordan's revenue contributed to 3% of the Group's revenue. While our operations in Iraq accounted 0.7% of Mezzan's revenue, with an increase of 19% year-on-year. Moving to the profit and loss. In the 3 months period ended March 31, 2023, Mezzan Group recorded a revenue of KWD 79 million compared with KWD 72.5 million in the corresponding period of 2022 for a growth of 8.9%. Gross profit reached KWD 16.5 million compared with KWD 14.6 million in the corresponding period of 2022, and the gross profit margin reached 20.9% compared to 20.1% in the previous comparable period. EBITDA reached KWD 8.3 million, up from KWD 6.2 million in the previous comparable period of 2022, for an increase of 33.8%. SG&A and other expenses reached to KWD 10.3 million compared to KWD 10.7 million in the previous comparable period for an increase of 3.3% year-on-year. In summary, Mezzan recorded a profit of KWD 4.6 million in a 3-month period of 2023, an increase of 49.9% from the same period in 2022. The group recorded a profit attributable to equity holders of the parent company of KWD 4.3 million compared to a profit of KWD 2.9 million in the corresponding period of 2022, for an increase of 45.1%. From a cash flow perspective, Mezzan recorded operating cash flow before working capital changes of KWD 8.8 million in 3 months period ended March 31, 2023, compared to KWD 7.7 million in the corresponding period of 2022, lowered by KWD 1.1 million year-on-year. We have recorded an inflow of working capital cash flow of KWD 2.5 million compared to an investment and working capital of KWD 2 million in Q1 last year. Mezzan's cash flow from operating activities reached KWD 11.2 million in the 3 months period of 2023, compared to KWD 5.7 million in the previous comparable period. Cash flows used in investing activities reached KWD 0.8 million in 3 months period of 2023 compared to an KWD 8 million in the corresponding period of 2022. As such, we recorded a positive cash flows before financing activities amounted to KWD 10.4 million in 3 months period of 2022 compared to a negative cash flow before financing activities of KWD 2.3 million in the previous comparable period. Our net debt stood at KWD 56 million, as of March 31, 2023, lower by KWD 2.2 million from March 2021 (sic) [ 2022 ]. From a balance sheet perspective, as of March 31, 2023, Mezzan's balance sheet size reached KWD 277.4 million, a total equity of KWD 111.4 million and net debt of KWD 56 million. Our net debt-to-EBITDA has reached 4.1x and is up by 1.1x compared to March 31, 2022, and it is lower by 1.4x compared to December 2022. And now I open the floor to your questions, and thank you.

Thank you, Nabil. Thank you, Garry. We will now be taking in our audience's question. We have a couple on the list, 6 or 7 already being submitted. Give us a second to go through them. And if you can go to any like being to like top questions into one in the interest of saving everyone's time. Garry, we have a question for you. We have several questions from [indiscernible] and others as well. About the price cuts in Kuwait, their impact and the way forward for these cash? So I think we should just move them to one question, and I'll hand over to Garry to you can tell us just the situation status on them and what's the outlook for it. Garry?

Sorry for that. I had actually sounded very intelligent. And for those of you who weren't aware, when COVID hit, the Minister of Commerce in Kuwait put in price controls to ensure that no gouging took place of consumers during that difficult period. Unfortunately, even though COVID has to all intents and purposes ended and receded into the background, that pricing order remains in place, which makes it very difficult for us to push through any price increases. Obviously, this is a time of global inflation, and that puts a severe strain on the business. What can we do? Well, we can do what we're already doing, which is focused on new, more profitable categories. We can focus on categories that we're already in, where perhaps the margins are higher, and we can cut our expenses as low as possible. We are engaging in every possible way to encourage the Minister to change that decision. And we remain hopeful that given the positive news on COVID in every other part of the economy, that he will do so in due course.

Thank you, Garry, for that summary. We have a question from Mohammed [indiscernible]. The question is, is the growth in foods revenue a result of the Ramadan impact? Garry?

No, it's not. There's undoubtedly an element of that, but the results in January and February and March were pretty consistent. And April, May are expected to be positive as well. So there's undoubtedly a small amount because it moves forward 2 weeks, but not a significant amount given that the sell-in was already in March last year.

Thank you. Next up, we have a question from [ Yousuf ] [indiscernible]. Garry, [ Yousuf ] is asking how much of your sales are through cooperative supermarkets?

Off the top of my head, I honestly don't know. And if you're talking about Kuwait only, it generally accounts for about 60% of our sales. But I can -- what I'll do, is I'll ask Omar to dig out the exact number and circulate it privately afterwards.

Great. Thank you. We have a question also from [indiscernible] He was asking, what are the key raw materials that you are exposed to at the food manufacturing business line? And are you seeing any declines in these raw material prices? Garry?

Sure. So one of the big ones would be potatoes, obviously, a key component of our KITCO brand. Bizarrely, the pricing on potatoes did not go up significantly. However, the logistics are getting the potatoes from Germany or India or wherever to Kuwait did go up substantially. And we are now starting to see an easing in the logistics costs. And in particular, but no real impact on the raw material cost, but in the logistics cost of getting them to us, and we hope to see that impacting in Q3 and Q4. And on packaging, prices remain high, and we are committing to a higher minimum order quantities in order to get the pricing down. And really from food manufacturing, that's -- those are probably the key ones.

All right. Thanks. Next couple of questions for Nabil. This question is from [indiscernible] as well. [indiscernible] is asking, how much of the receivables are related to cooperative supermarkets? And are there plans to reduce the outstanding amount? Nabil?

Thank you for the question. Basically, we have a sector contract in place. So I will say the pending balance is not covered by that. It's minimum compared to the total volume, which Garry talked about it today. I would say just only 10% of that is related to the cooperate, and the rest of that is other clients.

Thank you, Nabil. Let's see, are there questions we have coming in. Just give us a moment, please. We haven't missed any of your questions. We will wait for another 30 seconds or so, in case if anyone asks a question, as we speak. We have a question, Garry, from [indiscernible]. And they're asking -- the question is rather, how should we think about the margins for the rest of 2023? Would the first quarter be a good indication for the rest of the year? Garry?

At a margin level, yes, it should be. We would hope to see it improve slightly as we go through the year, and we have more and more initiatives landing. But as a starter for [ 10 ], it's probably as good as anything.

Thank you. We have a question. [indiscernible] asking us to repeat the revenues per country. So I'm going to be pulling up that slide and putting it on the screen for everyone. Mr. Mohammed [indiscernible], that was your request. If you look at your screen now, you'll see the slide, revenues per country. And I believe, with that, we have answered all questions and requests. And that brings us to the conclusion of today's call. Thank you, Garry. Thank you, Nabil, and thank you, our audience, for joining us on this first quarter earnings call. We look forward to seeing you in the coming quarter. And as a reminder, a live recording of this call will be available on the same link you used to get to this call in about 2 hours or so. Thank you, everyone, and have a good day.

Thank you.

Thanks, guys.