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

Good afternoon, ladies and gentlemen. Welcome to this Mezzan Holding's Q2 earnings call. The company's earnings were reported yesterday. Today is August 8, 2024. This call is held live and a recording of the live 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. Amr Farghal. He is Mezzan Holding's CEO for Food and FMCG; and as well Mr. Omar Samoud, he is 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 the CFO will deliver their respective statements over the next 10 minutes or so. Then we will 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. Mr. Farghal, the mic is yours.

Thank you, Fawaz. Good afternoon, everyone. Thank you for taking the time to join us today for our Q2 earnings call. I am pleased to share that Mezzan Holding has delivered a solid first half of the year. We'll discuss our financial performance in detail, along with our immediate priorities to drive our business performance. I will take you through a brief presentation reviewing the financial highlights, after which, I'll hand over to our CFO, Omar Samoud, who will take you through the details of the financial performance. We welcome your questions, and we'll address as many as possible today. If we are unable to cover all your queries, please feel free to send them to our Investor Relations team at [email protected]. We will respond promptly. Before presenting the earnings -- before presenting the earnings highlights for the first half of the year, I would like to brief you on the progress of the immediate actions we have taken as we work towards building our strategy. These actions are as follows: [indiscernible] our portfolio optimization to drive favorable mix with the objective of driving margin improvements. We also started looking at our end-to-end supply chain integration, focusing on creating synergies across our 14 factories and institutionalizing a lot of [indiscernible] practices. Outside Kuwait has always been a priority for us. We all know that our group enrolls a very strong business presence in Kuwait, and the next 3 years will witness a lot of knowledge and expertise transfers, accelerate our growth in all our strategic markets outside Kuwait. With this being said, in terms of our financial highlights and headline numbers for the 6-month period ended 30th of June 2024, our revenue reached KD 152.2 million, up from KD 140.4 million. This represents an 8.4% improvement year-on-year. Gross profit reached KD 34.9 million compared to KD 29.6 million in the comparable period for an increase of 18.2%. Our EBITDA in H1 reached KD 17 million versus KD 13.9 million, and this represents [indiscernible]. And the group achieved a net profit of KD 9 million compared to KD 6.6 million in H1 2023, and that's an increase of 37.1%. Finally, Mezzan net profit to shareholders of the parent company reached KD 8.5 million for H1 of 2024 compared to KD 5.95 million in H1 of 2023, and this represents an increase of 42.2%. At this point, I'll hand over to our CFO, Omar Samoud, to take you through the financials in more details. Omar, to you, please.

Thank you, Amr, and thank you, everyone, for attending the call. Let me walk you through the group financial results for half 1 2024. Looking into our top line performance and the revenue contribution by business line, we would underline the following. The Food segment accounted for 64.1% of total group revenue, an increase of 7.8% versus previous year. While the revenue of non-food segments accounted for the balance of 35.9%, scoring an increase of 9.5%. These prompts a balanced growth equation. Within the Food division, revenue of food manufacturing and distribution increased by 8.8%, contributing to 52.8% of group revenue. Revenue of food catering decreased by 12%, contributing to 5.8% of group revenue. And as previously disclosed, we have adopted a more selected approach to catering contracts, prioritizing those that are margin accretive, underlined with our margin enhancement goal. Dr. Amr mentioned it earlier. This strategy has successfully returned this business line into profitability. Revenue of Food services increased by 25.8%, contributing to 5.5% of group revenue. Our non-food group revenue reported under FMCG and Healthcare increased by 10.6%, contributed to 33.9% of group revenue. And finally, the revenue of Industrial segment decreased by 6.9% contributing to 2% of group revenue. We now move on to reviewing the performance by geography for the 6 months period of 2024. Operation in Kuwait contributed to 74.3% of Mezzan's revenue of 9.4%. In Kuwait, we have observed solid performance in both the food manufacturing and distribution and the FMCG and healthcare sectors, demonstrating the strength and resilience of these segments with the Mezzan portfolio. Revenue from our operations in the UAE contributed to 12.1% of Mezzan's revenue, increasing by 8.4%. Our UAE operations are performing well, enabled by our efficient and effective distribution expertise and capabilities, coupled with the continuously enriched portfolio. Revenue in Qatar decreased by 18.3%, accounting for 5.4% of Mezzan's total revenue. This decline was primarily due to our portfolio proving decision to voluntary focus on the Catering contract, which, of course, subsequently led to improved profitability. In Jordan, sales increased by 39.7%. Jordan revenue contributed to 5.7% of Mezzan's revenue. This revenue increase is attributable to the expansion of both our joint venture business as well as the retail distribution business. Saudi Arabia accounted for 2.5% of Mezzan's revenue, an increase of 1.6%. The positive momentum is driving continuous sequential improvement in KSA. Moving now to our P&L. The first half of 2024, our P&L performance stands as following: revenue of KD 152.2 million compared to KD 140.4 million in the previous comparable period, thus recording a set earlier, an increase of 8.4%. Both the food and nonfood business lines experienced a strong period. Food manufacturing and distribution, Services and FMCG performed well, though the overall results were slightly offset by modest declines in Catering and Industrials. Gross profit reached KD 34.9 million compared to KD 29.6 million a year ago, and gross profit increased by 190 basis points to reach 23% versus 21.1% in the previous comparable period. This again showcases our dedicated efforts to implement and sustain margin accretive growth initiatives. SG&A and other expenses reached KD 22.3 million compared to KD 20 million in half 1 2023, an increase of 11.5%. As a result, net profit reached KD 9 million versus KD 6.6 million in half 1 2023. Net profit attributable to equity holders of the parent company reached KD 8.5 million compared to $5.9 million in half 1 2023, an increase of 42.2%. From a cash flow perspective, Mezzan recorded operating cash flow before working capital changes of KD 17.2 million in this first half compared to KD 14.4 million in half 1 2023, up by KD 2.7 million. We have recorded an outflow in working capital cash flow of KD 9.7 million compared to KD 7.2 million in half 1 last year. This increase signifies our strategic emphasis on expanding our operations and fueling growth. Therefore, Mezzan cash flow from operating activity resulted in a KD 7.5 million compared to KD 7.3 million in the previous comparable period. Cash flow used in investing activities reached KD 5.1 million compared to KD 3 million in the previous comparable period. As a result, we recoded a positive cash flow before financing activities amounting to KD 2.4 million compared to KD 4.3 million in the previous comparable period. Our net debt stood at KD 66.5 million as of June 2024, lowered by KD 1.1 million from June 2023. Now, from a balance sheet perspective, as of 30th of June 2024, Mezzan balance sheet size reached KD 285.1 million. Total equity reached KD 122.9 million, and net debt as stated earlier, KD 66.5 million. Our net debt to EBITDA has reached 2.1x, down by 1.8x compared to half 1 2023 and maintained as of the full year 2023 closing level, despite our incremental investment efforts. Now I'll turn it over back to Amr for the closing remarks of our presentation.

Thank you, Omar. And before we begin our Q&A session, I would like to extend my gratitude to the entire Mezzan team for the positive momentum and dedication over the last 6 months. And I would like to thank you, Omar, our CFO and your team, for the effort in fostering a great work environment that led us to where we are now. So with this, I'll open the floor to -- I'll hand over to Fawaz.

Thank you, gentlemen. Thank you very much for walking us through the quarter and the half. We will not be taking any questions. [Operator Instructions] We have a question from Nishit Lakhotia. Nishit asks that the KSA revenue increase has only been modest at 1.6%. Looking ahead, will this grow EPS rate pickup and if yes, what segments will drive this? The question is going to be answered by the CEO.

Thank you, Fawaz. So in my opening remarks, we did say that there will be a focus on the strategic markets beyond Kuwait. Saudi Arabia definitely is a strategic market. We are committed and excited about the opportunity the KSA market represents for Mezzan. And we're going through a substantial enhancement with our KSA business. And we will be witnessing sequential improvement in our results as almost every cycle. So it will take time, but we are committed and we -- hopefully, we will start seeing greater contribution to Saudi in the future.

Our next question is also from Nishit. Nishit is asking for an update on the Al Shita [indiscernible] project and its time lines that could be shared. And what percent of KD 30 million has been invested in the project till date. And the question is going to be answered by the CFO. Omar?

Thank you, Nishit, and thank you for this question over the -- this key project, the Al Shita expansion. Al Shita is progressing after plan, okay? And we, today, are in line with the investment and the factory will be planned, which is spread over the 2 years, as stated earlier, so this year and next year. So, we are, I will say, confident to progress with the project as per the initial time line.

Thank you. We will not be taking other questions. We don't have questions submitted yet. [Operator Instructions] We do have a question here from Mr. [indiscernible] is asking if the team can comment on headwinds and tailwinds during the last quarter. And I'll hand over the mic to the CEO.

Thank you, Fawaz. I think definitely from a tailwind standpoint, the market dynamics in Kuwait were favorable, and we witnessed this through the growth that Omar has shared with us. So -- and in terms of headwind, I think there is nothing uncommon. Obviously, our region is going through a lot -- and this has its impact on the supply chain. But that's -- again, so basically, we are seeing some supply chain disruptions, but it's something that we cannot navigate that control. These are really the 2 major, I would say, headwind and tailwind, and thank you for the question.

Our next question is from Mr. [indiscernible] is asking what would be the growth strategy for the Food segment going forward? And would the focus be on pricing, volume or expansion? The question is going to be answered by the CEO as well. The mic is yours.

Thank you, Fawaz. We are -- as we speak, we are working. So, first of all, thank you very much, [indiscernible] on the question. You are a bit ahead of us with the question. We are working on the strategy as we speak. Basically, the strategy will be a combination of organic and inorganic growth opportunities, a lot is under studying every bit. At the end of the day, the primary objective that we are trying to accomplish is how can we enhance and improve on the quality of our earnings. So how can we focus on margin-accretive initiatives, whether through the different initiatives, whether they are organic or inorganic, so everything we're doing. And whether it's in Kuwait or other markets, it's about the product mix, and it's all about the margin improvement. So once we are in a position to disclose the strategy as approved by the Board, we'll be more than happy to share it with you. Thank you.

Thank you very much. I think with that, we will be concluding today's call. We've answered every single question we have received. So thank you all for joining us, and thank you Amr and Omar also for taking us through the quarter and answering these questions. We'll see everyone at the next call. Thank you again, and have a good day.