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 Q1 earnings, which were reported this morning, and today is May 13, 2024. This call is held live, and a recording of this live call will be available on the same link within about 2 hours. My name is Fawaz Sirri, I'm the moderator on today's call, and allow me to introduce our speakers for today. We have with us Mr. Amr Farghal, he is the Mezzan Holdings CEO for Food and FMCG and Chairman as well of the Executive Committee; and we have also Mr. Omar Samoud, Mezzan Holding's CFO. Ladies and gentlemen, I will be handing over the mic to Amr in a few seconds to start the call right after I take you through our usual call format. First, the CEO and CFO will deliver their respective statements over the next 10 minutes or so. Then we'll open the floor for the 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. Mr. Farghal, the mic is yours.

Good afternoon, everyone. Thank you, Fawaz. Before we begin today's presentation, I would like to take a moment to express our gratitude to Garry Walsh, the former group CEO of Mezzan Holding. Garry has dedicated 13 years of service to Mezzan, playing a pivotal role in bringing the company to its current stature. We sincerely thank him for his contributions and wish him the very best in his future endeavors. And now as Fawaz said, we will take you through a short presentation that we import the tailwinds we enjoyed and headwinds we faced during the 3-month period ended 31st of March 2024. I will then review the financial highlights, after which I'll hand over to Omar, who will take you through the details of the financial performance. Finally, we look forward to receiving your questions and we'll answer as many as possible today. If we can't cover everything, please feel free to send your questions to our Investor Relations teams at [email protected]. We will respond promptly. In terms of our tailwinds, in the first quarter of 2024, we embarked on a strategic journey to enhance our portfolio and channel mix. This initiative was driven by our commitment to navigate through the challenges of input cost volatility while steadfastly protecting our margins. By carefully selecting and emphasizing the right mix of products and channels, we aim not to just withstand the fluctuating market conditions, but to grow amid them. Also in the first quarter, we strategically started shifting and mobilizing our manufacturing hubs across different countries, we've significantly improved our efficiency, capacity and profitability. This proactive approach has allowed us to leverage local strength, reduce cost and enhance our overall operational performance. In terms of CapEx management, we've taken a focused approach by prioritizing projects that align with our strategic goals and generating demand. By optimizing our CapEx, we are ensuring that every investment we make is driven by market demand. We're closely monitoring the return on investment and progress of these projects to guarantee they deliver the results we aim for. And lastly, let me share an exciting development that highlights our commitment to staying ahead. Our IT team is leading a transformative initiative to upgrade our IS/IT landscape. This effort goes beyond merely upgrading technology. It's about reforming our decision-making and daily operations. By implementing new systems, we are streamlining processes across departments, enabling us to make faster, more informed decisions. The strategic enhancements will boost our operational efficiency and agility, including Mezzan remains competitive in a rapidly evolving market. And now from a headwind perspective, let me share a challenge that we'll be navigating that underscores our proactive approach to maintaining inventory stability. In today's volatile supply environment, ensuring consistent inventory coverage is crucial to avoid disruptions. And Mezzan will tackle this head on by implementing robust inventory management strategies. These measures have enabled us to maintain stable stock levels, effectively mitigating the risk associated with potential supply chain fluctuation. And it's been a significant effort. But by staying ahead of these challenges, we are ensuring that we can continue to meet our commitments and deliver for our customers. Another headwind is financing costs. Though in line with investment plan associated with our health care division, we will continue to proactively seek opportunities to lower these commitments. And in terms of our financial highlights and headline numbers for the 3-month period ended 31st of March 2024, our revenue reached KD 85.8 million, up from KD 79 million, an 8.2% improvement versus 2023 -- same period in 2023. Our EBITDA in Q1 reached KD 10.1 million versus KD 8.3 million, representing an increase of 21.7%. That left our net profit to the shareholders of the parent company in Q1 at KD 5.7 million versus a year ago of KD 4.3 million, a strong increase of 33.9%. And now I'll pass things over to Omar, who will delve into the details of our financial performance.

Thank you, Amr and Fawaz, and thank you, everybody, for attending the call. Let me walk you through the group financial results for Q1 2024. A look into our top line performance shows the revenue contribution by business line as following: the Food segment accounted for 61.4% of total group revenue, with an increase of 7% versus previous year, while the revenue of Nonfood segment accounted for the balance of 38.6%, scoring an increase of 10.2%. Within the Food division, revenue of food manufacturing and distribution increased by 8.4%, contributing to 51% of group revenue. Revenue of food catering decreased by 12.1%, contributing to 5.6% of group revenue. As mentioned in our previous calls, this is a result of our efforts to streamline our catering portfolio with the focus on margin-accretive contracts. Revenue of food services increased by 22.5%, contributing to 4.8% of group revenue. Our Nonfood group -- our Nonfood group revenues reported under FMCG and Healthcare, increased by 11.5%, contributing to 36.6% of group revenue. And finally, the revenue of Industrials segment decreased by 8.7%, contributing to 2% of group revenue. We will now move on to reviewing the performance by geography of the 3-month period of 2024. Operation in Kuwait contributed to 76.6% of Mezzan's revenue, up by 9.9%. In the [ food ] manufacturing and distribution sector, Kuwait demonstrated exceptional proficiency, paralleled by strong achievement within the FMCG and Healthcare division as well. Revenue from our operations in the UAE contributed to 11% of Mezzan's revenue, an increase of 5.8%. Revenue in Qatar decreased by 19.3% and contributed to 5.1% of Mezzan's revenue. In Jordan, sales increased by 39.3%, Jordan revenue contributing now to 4% of Mezzan revenue. Saudi Arabia accounted for 2.6% of Mezzan revenue with an increase of 5.3%. Moving now to the profit and loss. The first quarter of 2024 P&L performance stands as following: revenue of KD 85.5 million compared to KD 79 million in the previous comparable period, thus recording an increase of 8.2%. Gross profit reached KD 19.3 million compared to KD 16.5 million a year ago. And gross profit margin reached 22.6% compared to 20.9% in the previous comparable period, here again demonstrating our efforts to drive margin-accretive growth initiatives. SG&A and other expenses reached KD 11.4 million compared to KD 10.3 million in the previous comparable period, an increase of 10.3%. As a result, net profit reached KD 6.1 million versus KD 4.6 million in Q1 2023. Net profit attributable to equity holders of the parent company reached KD 5.7 million compared to KD 4.3 million in the previous comparable period, an increase of 33.9%. From a cash flow perspective, Mezzan recorded an operating cash flow before working capital changes of KD 10.3 million compared to KD 8.7 million in the previous comparable period, up by KD 1.7 million. We have recorded an outflow in working capital cash flow of KD 5.4 million used to fuel growth in comparison to a more modest investment of KD 2.5 million in Q1 last year. Therefore, Mezzan cash flow from operating activity resulted in KD 5 million compared to KD 11.2 million in the previous comparable period. Cash flow used in investing activity reached KD 1.7 million compared to KD 0.8 million in the previous comparable period. As a result, we recorded a positive cash flow before financing activity amounting to KD 3.3 million compared to KD 10.4 million in the previous comparable period. Our net debt stood at KD 57.8 million as of 31st of March 2024, up by KD 1.8 million from March 2023. From a balance sheet perspective, as of 31st of March 2024, Mezzan's balance sheet price reached KD 293.1 million. Total equity reached KD 125.9 million, and net debt, KD 57.8 million. Our net debt-to-EBITDA has reached 1.9x and is down by 2.2x compared to Q1 2023. Now I open the floor for your questions, and thank you again.

Thank you, Omar. Thank you, Amr, for taking us through the quarter. We will now be taking your questions. Please give us a moment, just go through them and possibly group similar questions together in the interest of saving everyone's time. Thank you, everyone, for waiting. We will now be taking any questions. We have a question from Nishit. This question is going to be answered by the CFO. Nishit Lakhotia is asking "Receivables -- there is a receivable jump in the first quarter. What is the reason for this? And will Mezzan be doing aggressive factoring to manage working capital?" Amr?

Okay. Thank you for your question. It's normal that we have a jump in receivables when we need to fuel growth. Growth comes clearly through, in fact, an extension of the receivable balances. And this is the main reason why we have this jump. When it comes to our policy with factoring, we are effectively looking into extending factoring to different business lines and to business transactions, okay? But we'll do it in a very selective way considering, of course, that we are also watching the increase of our financing costs.

The next question is from [ Rabia Amusa ]. Rabia is asking -- he has 2 questions. So I'll ask them at the same time. You can answer them one after the other. Rabia is asking, could you please repeat the point on why revenue from Catering segment declined by 12%? And is there any reason for the 90% decline in Qatari revenue? The 2 questions, one is Catering overall and one is Qatari revenue.

So when it comes to the Catering decline, I think we mentioned it also in the earlier calls that we are undergoing a portfolio rationalization. As mentioned also in previous earnings calls, we mentioned the fact that in Kuwait, for example, we exited the non-accretive contract scale, governmental non-accretive contracts. But also in Qatar, I mean, we have been very careful and very selective with our, I would say, new catering contract and any growth there because we are prioritizing kind of very secure customers to grow this type of business. So this is mainly due to our, as I said, optimization strategy with catering growing where, in fact, we manage better also our working capital and where we manage better also the credit risk.

Thank you. We will now be taking on more questions, give us a moment to go through the list. We have another question from Nishit. Nishit is asking, why is there a decent jump in selling and distribution expenses in the first quarter? And what is driving this jump? And the question is going to be answered by the CFO.

Thank you, Nishit. Again, here, I mean you can imagine that growth doesn't come for free. I mean selling and distribution expenses has been again here, mainly jumping due to the fueling the growth. So -- it doesn't mean that this trend is expected to continue for the year to go.

Thank you. Yes, let's see if we have more questions. We've answered all the questions we have received. We will stay on the line for another minute in case there are questions on their way to us or in case if you're thinking of asking a question, please go ahead and type it in right now, and we'll hang online for about a minute. Thank you. We have 2 questions coming in. The first one is by [ Michal ]. They're asking how should we think about margins going forward? Amr?

Okay. Thank you, Michal. Clearly, I think we will maintain this good momentum. We have already ignited in 2023, and we are confirming during this first quarter. So this improvement of the margin, the gross margin, which is key to our, I would say, net profit lending for the full year is expected to be maintained.

Thank you. Let's see if we have more questions coming in, looks like we do. We have a question from Mohamad Al-Sakhal. Mohamad is asking, can you shed some light on the GPM, gross profit margin? I believe, should we expect the same level of margins for the rest of the year? I'm just kind of size into the previous question as well. But go ahead, if you want to give any...

No, I think clearly, we don't change, I would say, a winning formula. I mean, if we have ignited this good margin improvement, the idea is that we are aiming to sustain it in the year to go. The real pace will be communicated in the coming earnings calls. But yes, if you are asking us whether this gross margin improvement is to be maintained or sustained? The answer is yes. Coming back perhaps to a question regarding the Jordan growth. I saw that there was a question, what really is behind our growth in Jordan. I mean, clearly, the -- our growth in Jordan is being supported by the KITCO launch that we have, I would say, further expanded in both modern trade and traditional trade, okay, but also, I would say, a good momentum on our venture business.

Thank you. We have what seems to be our last question. The questions from [ Palaz ] and [ Floris ] [indiscernible] on CapEx. [ Palaz ] is asking, can you please give us guidance on your CapEx for the current year? And in which country or sector will that CapEx be deployed?

Okay. Thank you, Palaz. Clearly, I think we made some communication on this that this year and most likely also next year will be a year where there will be major investment in our health care business, especially behind Al Shifa project. But again, we are also maintaining volume and revenue-generating CapEx across all our divisions without any segregation. So clearly, today, if we look at the spend, majority of our CapEx is in Kuwait.

Thank you, gentlemen. I think with that, we have come to the end of our first quarter call. We have answered all the questions that we have received. So thank you once again, gentlemen. Thank you to our audience. As I mentioned at the beginning of the call, a live recording of this call will be available to you on the same link you used to access this call. Thank you, everyone, and look forward to seeing you in next quarter's call. Thank you, and have a good day.