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

Good afternoon, ladies and gentlemen. Welcome to this call to discuss Mezzan Holding First Half Earnings for the year 2025, which were announced yesterday, August 13. Today is August 14, and this call is held live from Kuwait and the recording of the call will be available on the same link within 2 hours. My name is Fawaz Al-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, the CEO of Food and FMCG, and he's also the Chairman of the Executive Committee at Mezzan Holdings. And we have with us also Mr. Omar Samoud, and he's the Mezzan Holdings Group 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, then the CFO will each deliver their statements over 10 minutes or so, then we will open the floor to your questions and answers. [Operator Instructions] Please note the following that Mezzan Holdings reports, all its financial results in Kuwaiti dinars. Therefore, all figures mentioned during the call today are expressed in Kuwaiti dinar. 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, and thank you all for joining us today for Mezzan Holdings H1 2025 Earnings Call. Today's agenda includes a review of our financial performance. I'll begin with a high-level summary of our key financial highlights, after which our Group CFO, Omar Samoud, will provide a deeper dive into the results and offer further insights. We appreciate your participation and engagements today, and we look forward to addressing your questions during the Q&A session. If any queries remain unanswered, please do not hesitate to contact our Investor Relations team at ir@mezzan.com. The first half of 2025 brought no shortage of external challenges. In the second quarter, the global economy experienced turbulences with regional conflict adding uncertainty across our markets. Consumer spending remained soft, influencing shopping behaviors and demand patterns. On top of that, the new corporate tax law, the DMTT, came into effect with its executive bylaw issued at the end of June, and our H1 results are fully compliant with these new requirements. Despite these headwinds, Mezzan delivered a solid performance. We increased revenue by 4.5% to KWD 159 million, supported by an improved portfolio mix. Gross profit rose 12.1% to KWD 39.1 million and EBITDA increased by KWD 11.9% to KWD 19 million. Net profit before tax reached KWD 11.5 million, representing 7.2% of total net revenue, while net profit after tax was KWD 10.5 million, up 16% year-on-year, even after absorbing an additional KWD 0.5 million in taxes under DMTT. We're particularly encouraged by the margin expansion we've seen this year. Gross margin improved by 23% in H1 last year to 24.6% this year, driven by better pricing execution, tighter procurement controls, disciplined overhead management and continued refinement of our transfer pricing structure. These initiatives are delivering measurable benefits with further potential ahead. During the period, we sharpened our focus on Saudi Arabia and Qatar, deploying new teams to strengthen market presence, improve operational foundations and pursue higher-margin opportunities. This reflects our disciplined approach, staying focused on product availability, service continuity and operational efficiencies while navigating short-term volatilities. Looking ahead to the second half, our priorities remain clear: safeguarding profitability, preserving marginal tendency and maintaining capital discipline. While the operating environment remains dynamic, we are confident that our resilient portfolio, operational agilities and capable teams will keep us well positioned. With that, I'll hand over to Omar to walk you through the detailed financials. Omar, please go ahead.

Good afternoon, everybody. Thank you, Amr, and thank you all for joining the call. Let's take a closer look to our group financial results for the period ended 30 June 2025. Starting with the top line performance. Food segment remains the core pillar of our portfolio, contributing 63.3% of total group revenue, up 3.2% versus last year. Non-Food segment accounts for 36.7% of revenue, growing 6.8%. This overall portfolio pattern reflects the resilience of our diversified business portfolio and allow us to seize growth opportunity across diversified product segments. Zooming in further, our revenue performance stands as following: Food Manufacturing and Distribution grew 6.3%, representing 53.7% of group revenue, supported by market share expansion of our flagship brands in Kuwait, a testimony of our efforts for fostering brand equity. Food Catering declined 18.3%, contributing 4.6% of revenue, in line with our strategy to streamline and optimize this portfolio, as highlighted in previous calls. Food Services declined 3.3%, representing 5.1% of revenue following the divestiture of noncore activities. Clearly here, pest control is the example that was carried during 2024 and softer demand in the venture business. On the Non-Food side, FMCG and healthcare grew 7.7%, representing 35% of revenue with strong momentum in pharmaceutical and home and personal care. Industrial declined 9.4%, representing 1.7% of revenue, reflecting softer demand in oil refinery and plastic. Moving now to the revenue by geography. Kuwait contributed 75.7% of total revenue, up 6.5%, led by Food Manufacturing and Distribution and supported by health care and FMCG good performance. UAE contributed 12.2%, up 5.2%, supported by energy drinks and premium bottled water distribution. Ongoing efforts are being deployed to foster the brand equity and market presence of our own brands towards unleashing new growth opportunities. Jordan delivered 9.3% growth, contributing 6% of revenue, driven by expansion in KITCO salty snacks and premium fresh fruit and vegetables offering. Qatar declined 24.8%, contributing 3.9%, reflecting catering portfolio adjustments. Saudi Arabia declined 4.6%, contributing 2.3% as restructuring initiatives are still in progress to support building sustainable growth platform in the Kingdom. Profit and loss. Gross profit rose to KWD 39.1 million from KWD 34.9 million with gross margin improvement 160 bps to 24.6%. SG&A, including other expenses, totaled KWD 24.5 million, up 9.9%, reflecting strategic investments to fuel growth. As a result, net profit reached KWD 10.5 million, up from KWD 9 million last year. Net profit attributable to shareholders was KWD 9.9 million, up 17.1% year-on-year. Looking at our cash flow. Operating cash flow before working capital changes reached KWD 20.4 million, up from KWD 17.2 million. Working capital outflows was KWD 10.4 million versus KWD 9.7 million last year, driven by expansion-related inventory and receivable. Net cash flow from operating activities came in at KWD 10 million, up from KWD 7.5 million last year. Investing activity consumed KWD 8.4 million versus KWD 5.1 million last year, mainly for Al Shifa project, capacity expansion and infrastructure. Therefore, cash flow before financing activity was KWD 1.5 million versus KWD 2.4 million last year. Net debt stood at KWD 74.8 million, up KWD 8.3 million from June 2024, reflecting our ongoing investment cycle. Looking at our balance sheet, our fixed assets were KWD 134.3 million with total equity at KWD 131.1 million. Net debt-to-EBITDA stood at 2.2x, indicating a healthy leverage position while supporting growth investments. With that, we'll now open the floor for your questions. Thank you.

Thank you, gentlemen, for taking us through the first half of the year and focus on second quarter. We have a couple of questions coming in. We have a series of questions also that just came in that includes over 14 questions in a single entry. So if you just give us a moment to go through it to decide how -- what's the best way in answering all these questions in a manner that respects everyone's time and also answers all the questions that you. [Audio Gap] Thank you, everyone, and we're back after digesting the questions that we just got. Just give us a moment, and we're going to start sharing them. Our first question -- set of questions is from [ Mr. Ammar Prajwana. Mr. Ammar ] has asked 14 questions as I said earlier. We just grouped them, might have reordered them a bit just to give coherent answers at once. First, I'm going to ask CEO on behalf of [ Ammar ], a question about outlook. [ Ammar ] has asked, how is the company positioned to handle shifts in demand or regulation? And what are the main operational risks in the second half that the company sees and how are they being mitigated? And with that, I'll give the mic to CEO to answer.

First of all, I want to thank [ Ammar ] for a thorough and very rich, I would say, question or series of questions that he shows his interest in our business. In terms of how is the company positioned to handle shifts in demand and regulations, I think that particular point applies on almost every company that operates within our segments and our category. So we are spotting, and we are tracking and we are monitoring all the global trends, which are eventually basically, we witness them in markets before they reach our own here. So we are witnessing all these global trends. And we have the flexibility and the agility to be able to adapt to these actually ahead of time. And this gets reflected on our portfolio when it comes to our own brands. This gets reflected in our discussion with our partners, our principles when it comes to joint business planning that we do with those partners. So basically, it's all about trend is your friend. We monitor. We track all these trends, and we make sure that we adjust, and we have the agility and the flexibility to adjust to these trends as and when -- actually ahead of the curve. And this will always give us the edge and the advantage. And we're quite comfortable with the way whether us as executive management or the way the Board is empowering us to take such decisions to be able to adjust our courses as and when we see them necessary. And this gets reflected as well in our NPD, our new product development, our R&D capabilities that we acquired over the years and the way we reshape our portfolio. So it's a great question. And I can assure you that we are on top of our game, and we continuously -- this is a continuous improvement process, and we continuously keep on sharpening our portfolio and sharpening the way we handle our business.

Thank you. The next series of questions are more about the first half of this year. And we also have other questions from other participants, for example, Mr. Nishit Lakhotia. So I'm going to combine Nishit's questions with [ Ammar's ] questions, and they're basically asking the same thing. And the questions are, what are the main drivers behind the 12% increase in total operating revenue in the first half? What is driving FMCG and healthcare revenues year-on-year in second quarter? How sustainable this improvement in gross margin from 23% and which went up to 24.6%, which business segments contributed to the most to the 70% net profit growth? And were there any underperforming areas? And what is the outlook for the second -- for sales for the second half of the year? So a lot of questions. Amr?

Okay. The main drivers behind -- thank you, Fawaz. And again, thank you for a series of questions that I have to tackle all at once. So -- the main drivers behind the 12% decrease, obviously, Kuwait continues to be our stellar performer. So I'm going to look at it from a geography standpoint. Kuwait definitely was a stellar performer across all the businesses, across all our operations. Jordan has been a star performer as well. The UAE did very well, again, if I compare apple-to-apple. And in Qatar, our consumer business did extremely well. So these are businesses that performed very well. There are businesses that underperformed, but they underperformed. There were no surprises. Actually, these have been planned course corrections that we are taking. I have to accept the reality that some are taking a bit longer than we would like. But at the end of the day, I truly believe in the plan. I truly believe in the way we are executing our plans. And eventually, even those markets, and I'm talking specifically here about Saudi Arabia and our Catering business. These are the 2 businesses that have been required a lot of course corrections, and we are on track for that. So from a geography standpoint, it's Kuwait, Jordan, Qatar Consumer, UAE that are doing very well. We have -- we started the journey, and we will continue staying the course as far as Saudi is concerned and as far as the Catering business is concerned. So these are the main drivers of the 12% increase. Do we have more runway since we're talking about how sustainable the improvement is? We definitely see more runway ahead of us, and we will continue to work on our improvements, whether operational improvements, making sure that we continue with our consumer centricity as well as the focus that we have on the consumers and the shoppers and how can we continuously improve our in-store presence. And this is basically what will help us. Obviously, pruning the businesses the way we are doing it as well will help us. So fingers crossed, obviously, we definitely -- our business will continue to face headwinds. That's the nature of our business. However, we are well equipped and well positioned to be able to navigate those. And yes, so I'm quite comfortable that we will be able to maintain the current momentum.

Excellent. Thank you for that thorough answer. Do you want to add anything?

Yes. Just perhaps to add on what Amr said, I think this margin improvement comes also with all these pruning activity we are doing with some of our portfolio segments, especially the Catering. So yes, the margin improvement comes also as a result of this pruning activity focusing on really accretive contracts, especially in the Catering business. And I think the more the share of our own brands will increase in the future in this kind of recipe of growth, clearly, the more margin we will be able to unleash. So that's really the objective for us. Clearly, the margin improvement will also come from changing the mix and really kind of giving the right share or a bigger share also to our own brands.

Thank you. Next, you have questions on input costs. And if there are any inflationary pressures, [ Ammar ] is asking, first, have there been changes in input cost of suppliers that impacted the margin? And he's also asking what measures are in place to counter inflationary pressures going forward?