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 third quarter earnings, which are announced yesterday, November 8. This call is held live from several locations. A recording of this live call will be available on this link within 2 hours. My name is Fawaz Al-Sirri. I'm the moderator on the call today and allow me to introduce our speakers. Now with us is Mr. Garry Walsh, he is the company's CEO; and Mezzan's CFO, Omar Samoud. Ladies and gentlemen, I'll be handing over to Mike 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] 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, and Mr. Walsh, the mic is yours.

Good afternoon, everyone. Thank you, Fawaz, and I'd like to take a moment to just welcome Omar to the call, his first of, I hope, many, and I'm sure he'll have huge value over the coming years. We will take you through a short presentation reviewing both the tailwinds we enjoyed and the headwinds we faced during Q3 2023. I will then discuss the financial highlights, after which I will hand over to Omar, who will take you through the details of the financial performance through Q3 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 quick. From a tailwinds perspective, happily, we had a nonrecurrence of the adjustments we talked in this quarter last year. However, I'm pleased to say that we also had some great underlying performance improvements. We saw a recovery in our health care business after resuming full supply to Saudi. We saw a discontinuation of noncreative contracts in catering segment. So whilst you will notice the decline in turnover that has been offset by a significant improvement in profitability, you also see effective management of product and channel mix enabling in profitable growth, improved margins through the localization of our manufacturing footprint into both Saudi and Kuwait and effective CapEx management yielding working capital benefits. From a headwinds perspective, like most people, we're seeing increased interest rates yielding an additional burden on our finance costs. Our inventory levels have increased as we both fueled growth in our medicine business, but also taking some defensive positions within our food business. And obviously, we're starting to see the impact of an evolving tax environment in the GCC. In terms of our financial highlights and headline numbers for the 9-month period ended 30 September 2023, our revenue reached KD 205.5 million compared to KD 194.5 million in the comparable period for an increase of 5.7%. Building off that, our gross profit reached KD 44 million compared to KD 37.1 million in the comparable period for an increase of 18.7%. Gross profit margin increased by 236 basis points to reach 21.4%. While EBITDA reached KD 19.9 million, up from KD 3.1 million in the comparable period for an increase of 539%. The group achieved a net profit of KD 9 million compared to a loss of KD 6.3 million in the comparable period, an increase of 243.5%. Finally, Mezzan's net profit to shareholders of the parent company reached KD 8.1 million for the 9-month period of 2023 compared to a loss of KD 6.5 million in the comparable period for an increase of 224.3%. At this point, I'll hand over to Omar to take you through the financials in more detail, discussing the performance of the period ended 30th of September 2023.

Thank you, Gary. Thank you, for your words, and thank you, everyone, for attending the call. Let me walk you through the financial results as of 30th September 2023. As for revenue contribution by business line at Mezzan Group, in the 9-month period ended 30 September 2023, the food segment accounted for 65.3% of total group revenue for an increase of 2.3% compared to the previous comparable period, while the revenue of nonfood segment accounted for the balance of 34.7% of total group revenue with an increase of 12.7%. Within the Food Group, revenue of food manufacturing and distribution increased by 7.5%, contributing to 52.9% of group's revenue. Revenue of food catering decreased by 25.8%, contributing to 7.4% of group's revenue. Revenue of food services increased by 7%, contributing to 5% of group revenue. Revenue of FMCG and Healthcare increased by 13.5%, contributing to 32.3% of group's revenue. And finally, the revenue of industrial segment increased by 2.5%, contributing to 2.3% of group's revenue. We now move on to discussing the performance by geography for the 9-month period of 2023. Let's first review the year-to-date revenue by country. Operation in Kuwait contributed to 72.9% of Mezzan's revenue, up by 8.1%. Revenue from our operation in the UAE contributed to 12.6% of Mezzan's revenue decreasing by 2.3% compared to the previous comparable period. Revenue in Qatar decreased by 3.5% and contributed to 7.1% of Mezzan's revenue. In Jordan, sales increased by 18%. Jordan revenue contributed to 3.7% of the Mezzan's revenue. Saudi Arabia accounted for 2.6% of Mezzan's revenue with a decrease of 4.3%, while our operation in Iraq only accounted for 1% of Mezzan's revenue with an increase of 1.5%. If we would like to look at the year-to-date revenue by country, including its export proceeds but emphasizing on the geographical performance, the picture will look as following: Kuwait revenue adjusted by export proceeds would represent 69.3% of group's revenue. UAE with the same adjustments, represent 13.2% of group's revenue. Qatar revenue adjusted by export proceeds represents 7.5% of group revenue. Jordan revenue adjusted by export proceeds represent 4% of group's revenue. KSA revenue adjusted by the same represents 4.7% of group revenue. Iraq revenue adjusted by export proceeds represent 1% of group revenue. And finally, Bahrain adjusted by the same export receipts would represent less than 1%. Moving now to the profit and loss. In the 9 months period ending 30th September 2023, Mezzan Group recorded revenue of KD 205.5 million compared to KD 194.5 million in the previous comparable period, thus an increase of 5.7%. Gross profit reached KD 44 million compared to KD 37.1 million in the previous comparable period, and gross profit margin reached 21.4% compared to 19.1% in the previous comparable period. EBITDA reached KD 19.9 million, up from KD 3.1 million in the previous comparable period, an increase of 539%. SG&A and other expenses decreased to KD 30.6 million compared to KD 40.9 million in the previous comparable period, a decrease of 25.2%. As a result, net profit reached KD 9 million, up by 243.5% from the same period in 2022. Net profit attributable to equity holders of the parent company reached KD 8.1 million compared to a loss of KD 6.5 million in the previous comparable period, resulting in an increase of 224.3%. From a cash flow perspective, Mezzan recorded an operating cash flow before working capital changes of KD 20.6 million compared to KD 12.1 million in the previous comparable period, up by KD 8.6 million. We have recorded an outflow of working capital cash flow of KD 6.3 million compared to an investment in working capital of KD 4.3 million last year. Therefore, Mezzan's cash flow from operating activity resulted in KD 14.3 million compared to KD 7.7 million in the previous comparable period. Cash flow used in investing activity reached KD 4 million compared to KD 8.9 million in the previous comparable period. As a result, we recorded a positive cash flow before financing activity amounting to TRY 10.3 million compared to a negative cash flow before financing activity of KD 1.2 million in the previous comparable period. Our net debt stood at KD 63.6 million as of 30th September 2023, lowered by KD 1.5 million from September 2022. From a balance sheet perspective, as of 30th September 2023, Mezzan's balance sheet size reached KD 270.8 million, equity to shareholders of parent company amounting to KD 116.1 million, and as mentioned earlier, net debt of KD 63.6 million. Our net debt-to-EBITDA has reached 2.2x, and this down by 10x compared to 30 September 2022. It's noteworthy that this is the lowest level reached since September 2021. And now, I open the floor to your questions, and thank you.

Thank you, Gary, and thank you, Omar for walking us through the highlights of the quarter and financials as well. We will not be taking audience's questions. Please give us some moments to go through the list of questions that we have received. Thank you. We have a question from [ Mohamad Al-Sakhal ] and [ Mohamad's ] question is what caused the enhanced margins? And how sustainable are those margins? If you can give guidance regarding margins for the next year? And that question is going to be answered by the CEO, Garry.

Thank you for the question. Fundamentally, there were 3 things driving the improvement in margin. One, the overall mix within the business. So we've exited lower-margin catering business and replace that with higher-margin manufactured lines in both our medicine and food business. Two, portfolio management. We've delisted a number of lines that in the current situation, we were not capable of generating a return of and we managed to launch some MPD, which the consumers have appreciated and which is margin enhancing. And thirdly, we've got a real focus on our promotional management to make sure that we are giving the consumer the right rewards for purchasing our products and that we are getting a return on those investments in activity. So those are fundamentally the 3 things that have driven us. I would like to think that, yes, they are sustainable into next year. I believe we still have further work to do. Omar is probably more relaxed that we'll stay where we are. But I think over the next year, we should at least be hoping to match the margins we're currently generating.

Thank you. The next question is from Nishit from SICO. Nishit is asking if the pressure on Qatar business due to population decline post FIFA?

And I think as you're aware, we have 2 businesses in Qatar. One is a catering business and one is a food business. And I've actually been extremely heartened by the performance of our food business this year, which is pretty much flat, which in the context of the post-FIFA population is, to me, a very creditable performance. Our catering business, which, as you know, operated the concessions in the World Cup venues last year, obviously started to scale up in Q3 as different events started to happen. We ran very hot through Q4 and yet has seen a decline since. And we would expect to see an even bigger decline in Q4 as we were very clear last year that the World Cup is a one-off event.

Thank you, Gary. We have received 2 questions so far, and we have answered 2 questions. We're waiting on further questions to come our way. So if you're thinking of asking a question, please go ahead and send it through now. We will be waiting online to answer your questions. Ladies and gentlemen, thank you for handing through. We have answered all the questions that came our way today. And I'm just giving us an extra 10 seconds to see if we get any questions. We do have a question that just came through. The question is by [indiscernible] Talal asking, can you highlight CapEx in the next coming 2 years?

Sure. So Talal, as you're aware, we've been very impressed with the performance of our medicine business over the last 8 months. And as a result, we've committed to building a new factory for medicine, which will probably take 3 years to build at a total build cost of somewhere around KD 25 million. And in addition, we would expect normal ongoing CapEx through expenditure of KD 6 million, KD 7 million. So I think our rough guide would be somewhere around KD 12 million to KD 15 million each year for the next 2 years.

All right. Thank you, Garry. I think with that, we've answered all the questions, and we will kind of be wrapping up today's call. Thank you, everyone, for joining us. Thank you, Garry, and thank you, Omar, for taking us through the quarter, and we'll see everyone on the next call. Just a quick reminder before we hang up, a live recording of this call will be available on the same link you used in about 2 hours or so. Thank you again, everyone, and have a good day.