Mezzan K S C P : Transcript of the Analysts Conference

Transcript of Mezzan Holding

Earnings Call

For Q4 2023/FY 2023

Date Held

12 March 2024

Transcript of Earnings Call/Webcast for Q4 2023/FY 2023

Mezzan Holding Company KSCP.

Date: March 12, 2023

Time: 14.00 Kuwait Time

Speakers from Mezzan Holding Co. Executive Management:

Mr. Garrett Walsh - Group CEO

Mr. Omar Samoud - Group CFO

Moderator:

Fawaz Alsirri - Bensirri Public Relations

Fawaz Alsirri:

Good afternoon, ladies and gentlemen. This call is held to discuss the Mezzan Holding's Q4 earnings, which were announced yesterday.

Today is Tuesday, March 12th, 2024, and this call is held live from several locations. And a recording of this call will also be available on the same link within two hours.

My name is Fawaz Alsirri. I am the moderator on the call today and allow me to introduce our speaker. We have with us:

• Mr. Garry Walsh, the company's CEO.
• Mr. Omar Samoud, the company's CFO.

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 our usual call format.

First, the CEO and then the CFO will each deliver their statement over 10 minutes or so, then we will open the floor to the Q&A.

Now, to participate in the Q&A session, just type in your question on your screen at any time during the presentation. You can do that starting from now.

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, achievements or results.

And, Mr. Walsh, the mic is yours.

Garry Walsh:

Good afternoon, everyone. Thank you, Fawaz.

As Fawaz said, we will take you through a short presentation reviewing both the tailwinds we enjoyed and headwinds we faced during the twelve-month period ended 31 December 2023.

I will then discuss 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 are unable to cover all your questions, please feel free to send your

Transcript of Earnings Call - Q4 2023/FY 2023

questions to our Investor Relations team at [e-mail] we will get back to you as soon as possible.

In terms of our Tailwinds:

• Margin improvement through effective product/channel mix, and localization of manufacturing footprint. This was done by the huge efforts of everyone in the business, as you will see in the results, that we delivered the desired results.
• Benefits from the non-recurrence 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.
• Acceleration of our business in UAE and Jordan.
• We have exercised a very efficient CAPEX management.
• And we continue to seek to expand collaboration with relevant local brands, where our scale and expertise can be leveraged, and we trust that we will see the benefits of this throughout 2024.

From Headwinds perspective:

• Additional burden yielded from the peak in interest rates. This is not evasive, and I would like to thank the Finance Team for their hard work in increasing our receivables, which helped remediate our debt.
• Evolving tax environment in the GCC, which has impacted and will continue to impact our performance.
• The "Red Sea crisis" had no material impact on our P&L. However, it has led to maintaining critical inventory at higher level in order to avoid business disturbance.

In terms of our financial highlights and headline numbers for the twelve-month period ended 31 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 the 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 & Distribution and the FMCG & Healthcare sector. This achievement highlights the company's expertise in its fundamental business sectors, showing the strength and dependability of its operational structure.
• Our EBITDA in Q4 reached KD 8.1 million, versus KD 8.5 million in Q4 of 2022. A decline of 4.9%. That left the year at KD 27.9 million versus a prior year of KD 11.6 million, an improvement of 141.1%. Largely driven by an increase in our Gross Profit. 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 the shareholders of the parent company in Q4 at KD 3.4 million, versus a 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.

And before I hand over to Omar. I am pleased to say that the Board of Directors suggested a distribution of 20 fils per share as Cash Dividend, amounting to 20% of the share's nominal

Transcript of Earnings Call - Q4 2023/FY 2023

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 our 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.

Omar Samoud:

Thank you, Garry, and Fawaz. And thank you everyone for attending the call. Let me walk you through the financial results as of 31 December 2023:

As for revenue contribution by business line at Mezzan Group:

• In the twelve-month period ended 31 December 2023, the food segments accounted for 65.7% of total group revenue, for an increase of 1.8% vs previous year; while the revenue of non-food segments accounted for the balance of 34.3% of total group revenue, scoring an increase of 16%.
• Within food group, revenue of Food Manufacturing and Distribution increased by 8.4% contributing to 52.8% of Group revenue.
• Revenue of Food Catering decreased by 29.4% contributing to 7.8% of Group revenue. The decline observed in the revenue of the Catering segment can be primarily attributed to our strategic decision to terminate non profitable contracts, thus concentrating efforts on more accretive ventures within the catering segment. Additionally, a significant contribution to the revenue figures for the fourth quarter in 2022 was due to a contract with FIFA, which was an exceptional event. Consequently, when comparing the revenue for Q4 2023 to Q4 2022, a noticeable reduction is observed, owing to the singular nature of the FIFA contract.
• Revenue of Food Services increased by 6.7% contributing to 5.2% of Group revenue.
• Our non-food group, reported under FMCG and Healthcare, revenue increased by 17.1% contributing to 31.9% of Group revenue.
• And finally, the revenue of Industrial segment increased by 2.8% contributing to 2.4% of Group revenue.

We now move onto reviewing the performance by geography for the twelve-month period of 2023:

• Operations in Kuwait contributed to 72.1% of Mezzan's revenue, up by 9.8%. In the Food Manufacturing & Distribution sector, Kuwait demonstrated exceptional proficiency, paralleled by remarkable achievements within the FMCG & Healthcare divisions as well.
• Revenue from our operations in the UAE contributed to 13% of Mezzan's revenue, increasing by only 1% due to:
• • A downtrend: caused by the reallocation of our chilled meat production facilities from the UAE to Kuwait.

Transcript of Earnings Call - Q4 2023/FY 2023

• • An uptrend, due to the growth in the distribution of energy drinks and bottled water business, effectively offsetting the downturn in the Food sector.
• Revenue in Qatar decreased by 16.2% and contributed to 7.1% of Mezzan's revenue. As mentioned earlier, the decline in revenue was primarily observed in the Catering segment in Qatar and largely attributed to the conclusion of, 2022 World cup FIFA contract, which temporarily boosted revenues.
• In Jordan, sales increased by 16.6%. Jordan revenue contributed to 3.9% of Mezzan's revenue. Jordan witnessed a remarkable progress in its performance, primarily fuelled by an effective distribution of our "KITCO" Potato Chips. This upswing was also supported by new customer acquisition. Also worth mentioning, that the momentum was sustained in the Food Services segment, through our service agreements with the UN and its 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 the strategic decision to transfer a portion of its Salty Snacks production facilities to KSA. Throughout the year, we noticed a significant improvement in the distribution and visibility of our product range across KSA.

Moving to the Profit and Loss:

In the twelve-month period, ending 31 December 2023, Mezzan Group recorded:

• Revenue of KD 271.2 million, compared to KD 255.2 million in the previous comparable period. Thus, an increase of 6.3%.
• Gross profit reached KD 61.5 million, compared to KD 51.1 million in the previous comparable 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 comparable 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 comparable period.

From a cash flow perspective:

• Mezzan recorded an operating cash flow before working capital changes of KD 29.5 million, compared to KD 21 million in the previous comparable 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 last year.
• Therefore, Mezzan's Cash flows from Operating Activities resulted in KD 23.1 million, compared to KD 11.4 million in the previous comparable period.
• Cash flows used in investing activities reached KD 6.4 million compared to KD 10.3 million in the previous comparable period.
• As a result, we recorded a positive Cash Flows before Financing Activities amounting to KD 16.7 million, compared to a negative Cash Flow before Financing Activities of KD 1.1 million in the previous comparable period.

Transcript of Earnings Call - Q4 2023/FY 2023

• Our Net Debt stood at KD 59.1 million as of 31 December 2023, lower by KD 5.1 million from December 2022.

From a balance sheet perspective:

As of 31 December 2023, Mezzan's balance sheet size reached KD 281.2 million. Total Equity reached to KD 119.5 million and Net Debt of KD 59.1 million.

Our Net Debt to EBITDA has reached 2.1x and is down by 3.4x compared to 31 December 2022.

Now, I open the floor to your questions, and thank you again.

Fawaz Alsirri:

Thank you, Omar. Thank you, Garry, for taking us through the year. We'll now be taking on your questions. We already see a couple of questions come again, so please give us a moment to go through them. Thank you. We'll now be starting our Q&A session.

--- Q&A ---

Fawaz Alsirri:

We have three 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?

Garry Walsh:

That's a good question. Thank you, Rajat. That's a good question. I think the reality is we have done a huge amount around NPD 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 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.

Fawaz Al Sirri:

Thank you, Garry. Our next question is also from Rajat. The second of his three questions. Rajat is asking, any update on the new pharma manufacturing plant? Do you have any guidance on the CAPEX and size of the opportunity? Garry?

Garry Walsh:

Hi, Rajat. I think we've put on record that we expect to spend a hundred million dollars over this year and the following two years in terms of building that facility. I'd say I'm not prepared

Transcript of Earnings Call - Q4 2023/FY 2023

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. It's progressing nicely.

Fawaz Al Sirri:

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, Omar.

Omar Samoud:

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 these 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 amount.

Fawaz Al Sirri:

Thank you. And the next question is for Garry. Garry, we have a question from Nishit Lakotia. Nishit is asking, PBT from food segment excluding catering and services is that 2.3 million was one of the highest and a key reason for a 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?

Garry Walsh:

The margin was attained by taking a number of actions. And 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 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, particularly around our own manufactured products in Kuwait. I believe that there are further opportunities to continue down that path and improve things, but I don't see any reason why it would move backwards. As I've 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.

Fawaz Al Sirri:

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 Abdulmohsin. Abdulmohsin is asking, is there expectation to close down the catering segment? If so, is there a timeline?

Transcript of Earnings Call - Q4 2023/FY 2023

Garry Walsh:

There is no expectation to close down the catering segment. What we discovered, Abdulmohsin, is that when we look at it is the nature of the big public tenders, particularly in Kuwait, is that they go through a five-year cycle where they're very profitable some years and loss-making other years, and that really doesn't sit 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, 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 Alhamdulillah, we're coming out of that now and again, that business is profitable now and will be profitable as we move forward. So, no intention to close either of the catering businesses.

Fawaz Al Sirri:

Thanks. So Abdulmohsin has another question. The 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?

Garry Walsh:

Again, a good question in two parts as usual. On the first part, we would be anticipating that our revenues will grow by high single digits, and that will follow through to EBITDA and net profit. 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. 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 their strong performance this year and our belief in their future.

Fawaz Al Sirri:

Yeah, we're with you over here. I think we've answered our 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 sustainable rate for SG&A in 2024?

Omar Samoud:

Thank you, Rajat, for the question. When it come to the Q4 movement between 2022 and 2023 and this deterioration, it is mainly due, as mentioned earlier about the revenue from FIFA which was collected in Q4 2022. So, the deterioration comes from recording revenue that is posted under SG&A and subsequently has, I would say, reduced level in 2022.

So, when it comes to, I would say, clearly the way forward with the SG&A, we are really pursuing, let's say, efficiencies everywhere and clearly around our back-office activities, we are trying to increase automation by the implementation of a more monolithic ERP solution. Whether in fact the effects will be all, I would say "milked" or say recorded starting from in

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2024. But at least on a midterm base, we really expect our SG&A to be with a more efficient level.

When it comes to the question regarding now the CAPEX, you asked about how we plan to finance the CAPEX for the new plant. 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.

Fawaz Al Sirri:

Thank you, and with that answer from Omar, 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, wish you all and Ramadan Mubarak and a good day. And as a reminder, as always, a live recording of this call will be available on the same link in about two hours or so. Thank you everyone and have a good day.

-ENDS-

Transcript of Earnings Call - Q4 2023/FY 2023