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

Good afternoon, ladies and gentlemen. This call is held to discuss Mezzan Holdings Q4 earnings, which was announced yesterday. Today is March 12, 2024. This call is held live from separate 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 speakers. We have with us Mr. Garry Walsh, he's the company's CEO; and Mezzan CFO, Mr. Omar Samoud. 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 the usual call format. First, the CEO and CFO will deliver their respective statements. it will take about 10 minutes or so. Then we'll open the door 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. As Fawaz said, we will take you through a short presentation reviewing both the tailwinds we enjoyed and the headwinds we faced during the 12-month period ended 31st of December 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. Lastly, as Fawaz said, we will be happy to receive all your questions and answer as much as possible today. If we're 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 as soon as possible. In terms of tailwinds, our margin improvement program continued through effective product and channel mix and localization of manufacturing footprint. This is from a huge effort by everybody in the business, and as you will see in the results, has yielded the desired results. Benefits from the nonrecurrence of the one-off adjustment that adversely hit the performance of 2022 and did not recur in 2023. Good growth momentum in our pharma and healthcare business, partially supported by resuming supply to KSA following the upgrade of our newly acquired KSP facility. We had an acceleration of our business in UAE and Jordan. We exercised very efficient CapEx management, and we've continued to seek to expand collaboration with relevant local brands where our scale and expertise can be leveraged. We trust that we will continue to see the benefits of this through into 2024. From a headwinds perspective, there was an additional burden yielded from the peak in interest rates. This is not abated, and I would like to thank the finance team for their hard work in increasing our receivables, which help to ameliorate our debt. We obviously have phased into an evolving tax environment in the GCC, which has impacted and will continue to impact on performance. The Red Sea crisis had no material impact on our P&L. However, it has led to us to maintain critical inventory at a higher level in order to avoid business disturbance. In terms of our financial highlights and headline numbers for the 12-month period ended 31st December 2023. I am pleased to report that in Q4, our revenue hit KD 65.6 million, up from KD 60.6 million, an 8.2% improvement. That left turnover for the year of KD 271.2 million versus KD 255.2 million, a 6.3% improvement. In 2023, Mezzan witnessed a significant increase in its revenue streams, particularly from the food manufacturing and distribution and the FMCG and Healthcare sector. This achievement highlights the company's expertise in its fundamental business sectors, showing the strength and the tangibility of its operational structure. Our EBITDA in Q4 reached KD 8.1 million versus KD 8.5 million in Q4 of 2022, a quarter in which we hosted the World Cup concession program. This is a decline of 4.9%. That left the year at KD 27.9 million versus the prior year of KD 11.6 million, an improvement of 141.1%, largely driven by an increase in our gross profit and our dedication to the introduction and development of new products has brought about considerable success, boosting our gross margin and overall financial health. That left our net profit to shareholders of the parent company in Q4 at KD 3.4 million versus year ago of KD 4.6 million. Finishing the year at KD 11.5 million versus a loss in the prior year of KD 2 million. A remarkable comeback from the 2022 downturn, showcasing exceptional growth and resilience. Finally, in terms of the results, I'm pleased to say that the Board of Directors suggested a distribution of KD 0.020 fils per share as a cash dividend amounting to 20% of the shares nominal value. They've set the dividend payout ratio at 55%. This suggestion is on the agenda for the upcoming Annual General Meeting, where shareholders will have the chance to cast their votes. Finally, I would like to thank the team throughout the business, all 8,500 employees as well as our partners and suppliers who worked so hard to enable us to deliver this turnaround in 2023. Over to you, Omar.

Thank you, Garry. Thank you Fawaz, and Thank you, everyone, for attending the call. Let me walk you through the financial results as of 31st of December 2023. As for revenue contribution by business line, the Food segment accounted for 65.7% of total group revenue, an increase of 1.8% versus previous year. While the revenue of nonfood segment accounted for 34.3% scoring an increase of 16%. Within Food Group, revenue of food manufacturing and distribution increased by 8.4%, contributing to 52.8% of group's revenue. Revenue of food catering decreased by 29.4% contributing to 7.8% of group's revenue. This decline observed in the revenue of catering segment is primarily attributed to our strategic decision to terminate nonprofitable contract, thus, concentrating efforts on more accretive ventures within this segment. Additionally, a significant contribution to the revenue figures for the fourth quarter in 2022, as earlier highlighted by Garry, was due to a contract with FIFA, which you can imagine, was an exceptional event. Consequently, when comparing the revenue of Q4 2023 to Q4 2022, the noticeable reduction is observed owing to the singular nature of these contracts. Revenue of food services increased by 6.7%, contributing to 5.2% of group revenue. Our nonfood group reported under FMCG and Healthcare. Revenue increased by 17.1%, contributing to 31.9% of group revenue. And finally, the revenue of our industrial segment increased by 2.8%, contributing to 2.4% of group revenue. We now move on to reviewing the performance by geography for the 12 months period of 2023. Operation in Kuwait contributed to 72.1% of the group's revenue, up by 9.8%. In the food manufacturing and distribution sector, Kuwait demonstrated exceptional proficiency, [ correlated ] with by remarkable achievement within the FMCG and Healthcare division. Revenue from our operation in the UAE contributed to 13% of Mezzan revenue, only increasing by 1%. But this is a sum of the downturn caused by the reallocation of our chilled meat production facilities from UAE to Kuwait and an upfront due to the growth in our distribution business of energy drinks and bottled water. Effectively offsetting the downturn in the food sector. Revenue in Qatar decreased by 16.2% and contributed to 7.1% of Mezzan revenue. As mentioned earlier, the decline in revenue was primarily observed in the catering segment in Qatar and largely attributed to the conclusion of the 2022 World Cup FIFA contract, which temporarily boosted our revenues. In Jordan, sales increased by 16.6%. Jordan contributed to 3.9% of Mezzan's revenue. Jordan witnessed a remarkable progress in its performance, mainly fueled by the effective distribution of our KITCO potato chips. This upswing was also supported by new customer acquisition. Also here, worth mentioning that the momentum was sustained in the Food service segment through our service agreements with the UN and these affiliated bodies. Saudi Arabia accounted for 2.8% of Mezzan's revenue with an increase of 2.1%. In the third quarter of 2023, Mezzan made its strategic decision to transfer a portion of its Salty Snack production facility to KSA. Throughout the year, we noticed the significant improvement in the distribution and visibility of our product range across KSA. Now moving to the profit and loss. In the 12-month period of 2023, Mezzan Group recorded a revenue of KD 271.2 million compared to KD 255.2 million in the previous year, thus, recording an increase of 6.3%. Gross profit reached KD 61.5 million compared to KD 51.1 million in the previous period. And gross profit margin reached 22.7% compared to 20% in the previous comparable period. SG&A and other expenses decreased to KD 42.6 million compared to KD 49.6 million in the previous period, a decrease of 14.1%. As a result, net profit reached KD 12.7 million versus a loss of KD 1.7 million in 2022. Net profit attributable to equity holders of the parent company reached KD 11.5 million compared to a loss of KD 2 million in the previous period. From a cash flow perspective Mezzan recorded an operating cash flow before weighted capital -- before working capital changes of KD 29.5 million compared to KD 21 million in the previous period, up by KD 8.4 million. We have recorded an outflow of working capital cash flow of KD 6.4 million compared to an investment in working capital of KD 9.6 million in the previous year. Therefore, Mezzan's cash flow from operating activity resulted in KD 23.1 million compared to KD 11.4 million in the previous period. Cash flow used in investing activity reached KD 6.4 million compared to KD 10.3 million in the previous comparable period. As a result, we recorded a positive cash flow before financing activity amounting to KD 16.7 million compared to a negative cash flow before financing activity of KD 1.1 million in the previous period. Our net debt stood at KD 59.1 million as of 31st December 2023, lower by KD 5.1 million from December 2022. From a balance sheet perspective, as of 31st of December 2023, Mezzan balance sheet reached KD 281.2 million, total equity reached KD 119.5 million and net debt as said earlier, reached KD 59.1 million. Our net debt-to-EBITDA has reached 2.1x and this down by 3.4x compared to the December -- 31st of December 2022. Now I open the floor to your questions, and thank you, again.

Thank you, Omar. Thank you, Garry, for taking us through the year. We will now be taking on your questions. We already see a couple of questions come again, but please give us a moment to go through them. We will now be starting our Q&A session. We have 3 questions in a row by Rajat Bagchi, but we're going to take them on one by one. Garry, the first question is coming to you. Rajat is asking, how should we think about the volume and price growth in 2024 compared to 2023?

Thank you, Rajat. That's a good question. I think the reality is we have done a huge amount around NPD factory movements, dealing with customers to maximize our product and channel mix and really take advantage of opportunities in 2023. And some of those will continue to annualize throughout 2024. So I would expect to see improvement, but not significant improvement. In terms of raw materials and things like that, the reality is we were starting to unwind post-COVID. We went long once we saw the Red Sea emergence. So we're -- on our key commodities such as rice, tuna, et cetera, we're covered out for quite a good period. So I wouldn't expect to see that deteriorate or improve in the short term.

Thank you, Garry. Our next question is from -- also from Rajat. The second of the 3 questions Rajat is asking, any update on the new pharma manufacturing plant? And do you have any guidance on the CapEx and size of the opportunity? Garry.

Rajat, I think we've put on record that we expect to spend $100 million over this year and the following 2 years in terms of building that facility. Whilst say I'm not prepared to share any outcome on that, we obviously wouldn't be doing that if we didn't expect a substantial return. And nothing that I've seen from the team over the last year since the Board approved that would lead me to feel any differently and it's progressing nicely.

Thank you. Rajat's last question is, he's asking, do you have any update on the Qatar provisions? And is there any realistic chance to get them reversed in 2024 and 2025. And that question is going to be answered by the CFO, Mr. Omar.

Thank you, Rajat, for the question. When it comes to Qatar, for our catering business, we are, of course, still pursuing our business in Qatar. We have taken a very prudent call on, I would say, this unsettled debtor positions by fully provisioning them, and we are still today progressing with the concerned debtors to agree on a settlement plan. So whether that settlement plan will be finalized by 2024 or 2025. I would say it's a little bit too early, but we think that there will be some recovery of the fully provisioned amounts.

Next question is for Garry. Garry, we have a question from Nishit Lakhotia. Nishit is asking. PBT from Food segment, that's catering and services, is at KD 3.3 million was one of the highest and a key reason for strong fourth quarter. Is it mainly due to moving in high-margin products or any other factors such as lower cost of procurement, price increases, et cetera, and also how sustainable are these margins?

There's no easy questions today. Look, that margin was attained by taking a number of actions. We have moved manufacturing to lower-cost environments for some of our products. So for example, our tortilla product, the KITCO MEXITA, we have moved the manufacturing of that to Saudi. Our chilled meat and manufacturing has moved from Sharjah to Kuwait. And there are a number of initiatives that we will continue to take along that stream. There were also a number of difficult decisions we made about product and channel mix earlier in the year, and those negotiations or changes began to bear fruit in Q4. And then finally, we've also had an extensive NPD program over the last 18 months and particularly around our own manufactured products in Kuwait. And I believe that there are further opportunities to continue down that path and improve things. But I don't see any reason why [indiscernible] would move backwards. As I said earlier on, I don't see raw materials being a huge positive or negative for us in 2024. I think that answers the question.

Thank you, Garry. We have more questions coming your way. We just have to take a moment to go through them. We have a question from [indiscernible] is asking, is there an expectation to close down the catering segment? If so, is there a timeline?

No, there is no expectation to close down the catering segment. What we discovered [indiscernible] is that when we look at it, the nature of the big public tenders particularly in Kuwait is that they go through a 5-year cycle where they're very profitable some years and loss-making other years. And that really doesn't fit naturally with us as a listed company. So what we've done is we've repositioned ourselves to focus very much on the private catering businesses to private enterprises and some smaller government contracts to be fair, but mostly private enterprises, like oil rigs like the joint operating base, and that has borne fruit. So despite the fact that the turnover is down within Kuwait and the business is fundamentally profitable now. Within Qatar, there's no doubt like most of Qatar, we went through a post-World Cup dip, but [Foreign Language] we're coming out of that now. And again, that business will be profitable, is profitable now and will be profitable as we move forward. So no intention to close either of the catering businesses.

Thanks. So [indiscernible] has another question his second question is, what is the expected growth in 2024 top line revenue? And how much of that can be attributed to the recent increase in your ownership in KSPICO.

Again, a good question in 2 parts as usual. On the first part, we would be anticipating that our revenues will grow by high single digits and that, that will follow through to EBITDA and net profit. And in terms of our increased ownership in KSPICO, that doesn't actually reflect in our top line as we were already fully consolidating the P&L. What it will do is it will reduce the minority interest deduction on our profit and make more of the profitable attributable to our shareholders. And we are very comfortable with our medicine business, as I said earlier, and that's why we're continuing to invest in it, reflecting both our strong performance this year and our belief in their future. Fawaz?

Yes, we're with you over here. I think we've answered the question. We have a question for Omar, the CFO. The question is, please explain the reason behind the increase in SG&A in Q4 of this year compared to Q4 of 2022, and do you have any guidance on a sustainable rate for SG&A in 2024?

Thank you, Rajat, for the question. When it comes to the Q4 movement between 2022 and 2023, and this deterioration, it's mainly due, as mentioned earlier about the revenue from FIFA, which was collected in Q4 2022. So the deterioration comes from recording a revenue that is posted under SG&A and subsequently has, I would say, reduced 11% in 2022. So when it comes to, I would say, clearly, the way forward with SG&A, we are really pursuing, let's say, efficiencies everywhere. And clearly, around our, I would say, back-office activities. We are trying to increase automation by the implementation of more monolithic ERP solution, whether, in fact, the effects will be all, I would say, milked or, let's say, recorded starting from -- in 2024, but at least on a midterm base, we really kind of expect our SG&A to be -- with a more efficient, I would say, level. When it comes to the question regarding the CapEx, you asked about how we plan to finance the CapEx for the new plants. As mentioned earlier, there has been, in fact, clearly a cash injection through the capital increase. So that's part of the funds to fund the new CapEx. And of course, the rest will be through bank loans.

Thank you. And with that answer, Omar, from the CFO. We have answered all the questions that we have received today. I would like to thank everyone who joined us on this call. And of course, special thanks to the speakers for walking us through the year and answering all your questions. Our next webcast is going to be held for the Q1 earnings. For now, I wish you all Ramadan Mubarak, a good day. And as a reminder, as always, a live recording of this call will be available on the same link in about 2 hours or so. Thank you, everyone, and have a good day.