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 second quarter earnings, which were announced on Thursday, the 3rd of August. This call is held live from several locations and a recording of this 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 our speaker. Mr. Garry Walsh, he's the company's CEO, and he will be taking us through the quarter's highlights shortly. But before I hand over the mic to Garry, I would like to cover a few things first. [Operator Instructions] I would also like to mention that since today's call is held from multiple locations, it may take us a bit longer to address your questions, but we will address them. 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. I will take you through a short presentation reviewing both the tailwinds we enjoyed and the headwinds we faced during half 1 2023. I will then discuss the financial highlights and then take you through the detailed financial performance for H1 2023. Lastly, as Fawaz said, I will be happy to receive your questions and answer as many as possible today. If I'm 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, new product launches are very strongly driving margin recovery as both ourselves and our principals focus on launching new products, which will meet consumer needs but also address the ongoing inflation issues. You can see from our numbers that there's been extremely tight management of costs, where, despite significant interest rate rises, we have been able to contain our costs. I would also mention that we have been exiting Kuwait government catering contracts to focus on more lucrative opportunities that may be smaller but generate higher returns, and you can see that reflected in the performance of our Catering division in half 1 2023. From a headwinds perspective, persistent inflation is resulting in numerous challenges. And every time we think we're at the back of it, we see something new. So obviously, the current weather challenges are causing issues in Europe for potato crops. And you've all read of the recent Indian ban on non-Basmati rice, which continues to drive inflation. And as I mentioned earlier, we need to continue to find ways to manage that. Staff turnover has increased given our focus on cost. That is having negative impacts on some of our operations. However, we are focused on retaining the key people and addressing any deficiencies as quickly as we can. One area where we need to improve in the second half of the year is our stockholding. You will notice in our numbers that our stock numbers are substantially up year-on-year. Some of that was by choice. Some of that was a nature of the medicine market. However, we are confident that we will bring it back in line by the end of the second half, thus generating better cash returns. And as I mentioned earlier, we are obviously focusing on higher interest costs, which I believe in half 1 cost us KWD 1.3 billion delta year-on-year. In terms of our financial highlights and headline numbers for half 1, 2023, our revenue reached KWD 140.4 million, up by 4.8% compared to half 1 2022 levels. Our gross profit reached KWD 29.6 million compared to KWD 25.6 million in the comparable period, for an increase of 15.4%. Our gross profit margin increased by 190 basis points to reach 21.1%. While EBITDA reached KWD 13.9 million, up from KD 8.3 million in the comparable period, for an increase of 67.7%. The group achieved net profit of KWD 6.6 million compared to KWD 2.04 million in half 1 2022, an increase of 224%. Finally, Mezzan's net profit to shareholders of the parent company reached KWD 5.9 million for half 1 2023, compared to KWD 1.9 million for half 1 2022, for an increase of 215%. I will now take you through the financials in more details, discussing the performance of H1 ended 30th of June 2023. From a revenue contribution by business line at Mezzan Group, in half 1 2023, the Food Group accounted for 64.5% of total group revenue for an increase of 2.2% compared to half 1 2022, while the revenue of Non-Food Group accounted for the balance of 35.5% of total group revenue for an increase of 9.7%. In half 1 2023, revenue of Food Manufacturing & Distribution increased by 6.6%, contributing to 52.6% of group revenue. Revenue of Food Catering decreased by 23.4%, contributing to 7.2% of group revenue. Revenue of Services increased by 8.2%, contributing to 4.7% of group revenue. Revenue of FMGG & Healthcare increased by 10.3%, contributing to 33.2% of group revenue. And the revenue of the Industrials segment increased by 2.2%, contributing to 2.3% of group revenue. If we move on to discuss operations per geography for half 1 of 2023, operations in Kuwait contributed 73.6% of Mezzan's revenue, up by 6%. Revenue from our operations in the United Arab Emirates contributed to 12.1% of Mezzan's revenue, decreasing by 4.6% compared to half 1 2022. It's important to note that in half 1 2022, Expo was still in full swing. Revenue in Qatar increased by 7.2% and contributes to 7.2% of Mezzan's revenue. In Jordan, sales increased by 18.3%. Jordan revenue contributed to 3.5% of Mezzan's revenue. Saudi Arabia accounted for 2.7% of Mezzan's revenue for a decrease of 1.9%. While our operations in Iraq accounted for only 1% of Mezzan's revenue, with an increase of 3.1%. Moving to the profit and loss. In the 6 months ended 30th of June 2023, Mezzan Group recorded revenue of KWD 140 million, an increase of 4.8% compared to half 1 2022. Gross profit reached KWD 29.6 million compared to KWD 25.6 million in half 1 2022. And gross profit margin reached 21.1% compared to 19.1% in half 1 2022. EBITDA reached KWD 13.9 million, up from KWD 8.3 million in half 1 2022, for an increase of 67.7%. SG&A and other expenses decreased to KWD 20 million compared to KWD 22 million in half 1 2022, for a decrease of 9%. In summary, net profit had reached KWD 6.6 million in half 1 2023, up by 224% from the same period in 2022. Net profitable attributable to equity holders of the parent company reached KWD 5.9 million compared to KWD 1.9 million in half 1 2022, for an increase of 215%. From a cash flow perspective, Mezzan recorded operating cash flow before working capital changes of KWD 14.6 million in half 1 2023 compared to KWD 12.1 million in half 1 2022, up by KWD 2.5 million. We have recorded an outflow of working capital cash flow of KWD 7 million compared to investment in working capital of KWD 9.8 million last year. Mezzan's cash flows from operating activities reached KWD 7.6 million in half 1 2023, compared to KWD 2.3 million in half 1 2022. Cash flows used in investing activities reached KWD 2.9 million compared to KWD 8.8 million in half 1 2022. As such, we recorded a positive cash flow before financing activities amounting to KWD 4.7 million in half 1 2023, compared to a negative cash flow before financing activities of KWD 5.6 million in half 1 2022. Our net debt stood at KWD 67.6 million as of 30th of June 2023, lower by KWD 0.1 million from June 2022. From a balance sheet perspective, Mezzan's balance sheet size reached KWD 271.5 million. Equities to shareholders of parent company stood at KWD 104 million, and net debt stood at KWD 67.6 million. Our net debt-to-EBITDA has reached 3.9% and is down 0.4% compared to 30th of June 2022. And now I open the floor to your questions, and thank you.

Thank you very much, Garry. We will now be taking in our audience's questions, and we already have 2 so far. Let me just go through them. Great. Our first question is from Rajat from NBK Capital in Kuwait. Rajat is asking, "Can you please comment on developments relating to pharma segment? And how should we think about the segment going forward? And what could be its contribution to the current revenue and EBITDA?" Garry?

And apologies to everybody that Nabil isn't here. He had technical difficulties, so...

Garry, you might be on mute.

No. Hello, Fawaz. Can you hear me?

Yes, now we can.

Sorry, apologies, everybody. From a pharma perspective, we're very happy with the performance in pharma so far. We're very happy to see the recovery in KSP as we finish our capital investment there. And that business has grown strongly in the first half, and we expect that growth to continue into the second half. And indeed, we expect it to grow very strongly looking forward to 2024. We continue to invest strongly in CapEx in that area. We are investing strongly in our Shifa project, where we anticipate probably spending somewhere in the order of KWD 30 million over the next 3 to 4 years, and we'll share more details of the expected outcome of that project as we move forward. However, it's fair to say that the business is performing well, and we expect that to continue. In terms of -- and it is very export focused. And certainly, we need to look at changing our deck as time goes forward to share more of that detail to give everybody a better spread. In terms of the CapEx impact on this year for Shifa, we would expect to probably spend, by the year-end, something in the order of KWD 8 million to KWD 9 million.

Rajat has a follow-up question. His question is, "How should we think about CapEx as a percent of revenue for the rest of 2023 and in full year 2024?"

Rajat, I wouldn't know that question off the top of my head. I would suggest that we ask Omar to e-mail that to you afterwards.

We have a question from Ahmad Asiri from Markaz, Kuwait Financial Centre. Ahmad is asking, "Would you please comment on the pricing environment in Kuwait? Did you pass all the increase of the cost to the consumer?"

The pricing situation in Kuwait remains extremely difficult. As you know, despite COVID being over, the government has kept price controls in place. What we have done, and as you can see in our expenses is we have minimized our cost as much as possible. We have reduced our promotions and activity in the market as much as possible. We have value engineered products as much as possible. We have also brought forward an [ NPD ], which consumers appear to have liked, which better reflects the current cost structures of manufacturing. We hope to continue that activity as we go through half 2, and you can see that in our expanding margins.

Let me look at the questions we have. We've answered all the questions that we have received so far, but we will stay online in case anyone has any question in mind. We have 2 questions coming in. Allow us a minute to go through them. We have a question from Rajat, Garry. Rajat is asking, "Can we get an idea about trend in volumes in the Food segment in Kuwait compared to levels seen during pre-COVID?"

Rajat, we are very confident that volumes are coming back to pre-COVID levels. Our issue is the margin impact. So far, we're seeing very strong volume growth in Kuwait in year, and we hope to see that continue through to the end of the year. So from a COVID perspective, it's -- we would see it as something that is now behind us.

Next up, we have a question from Nishit Lakhotia. Nishit is asking, "What is the reason for the weakness in the second quarter year-on-year in the UAE? The Expo was concluded by March 2022. So second quarter. Assuming they should not be that weak." Garry, would you like to respond to Nishit?

Sure. Sorry, Nishit. That's a very fair point. And to be clear, our business in the UAE is predominantly focused on the retail sector. So for us, the key component of the retail of the business and the impact of Expo was the people that actually came to live and work in Expo rather than, particularly, the visitors to the country for Expo. As you will realize, most people generally time their moves around the end of school year, et cetera. So we saw the population growth -- or the population stay high right through to the middle of June, end of May, middle of June, and we can see in our own numbers very strong performances as we come out of July, August, September, and that's reflected in conversations with competing businesses.

We have a follow-up question from Rajat. Rajat is asking, "How should we think about the overall growth in revenue and profit given the tailwinds you discussed in the beginning of the presentation? Do you think these levels of volume growth and margin expansion are sustainable going forward?" Garry?

Rajat, I do think they are sustainable going forward. I mean our intention is to, very shortly, get back to the margin levels that we enjoyed pre-COVID and the growth levels we enjoyed pre-COVID. And fundamentally, the consumer hasn't changed. Fundamentally, the consumer still needs to eat. Fundamentally, we need to make sure that our products are available and well displayed. And we trust that if we do that, the customer would stick with us. As you realize, most of our brands in Kuwait and in other countries are either #1 or #2 in their markets. We invest well in our brands, and we're confident in their ability to exceed -- to succeed in the long term.

Thank you. With that, we've answered all the questions that we have received, and we will be concluding today's call. As a reminder to everyone, a live recording of this call will be available on the same link that you used to access this live version. Thank you all for joining us. Thank you, Garry, for taking us through the first half and the second quarter, and we look forward to seeing everyone at the next call. Thank you, and have a good day.

Thank you all.