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

Hello, and good afternoon, ladies and gentlemen. Welcome to the Mezzan Holdings H1 2026 Earnings Call. Today is Thursday, August 13, 2026, and we are hosting this call live from Kuwait. A recording will be available on the same link within 2 hours. My name is Fawaz Alsirri. I will be moderating today's call. And with us are Mr. Amr Farghal, he's the Group Chief CEO; and as well Mr. Omar Samoud, he's the Group Chief CFO. Before handing over the mic to the CEO, let me briefly outline the format of today's call. The CEO will begin with prepared remarks, followed by the CFO, who will take you through the financial performance in further detail. After the prepared statements are made, we will open the floor for questions. [Operator Instructions] Please note that Mezzan Holdings reports its financial results in Kuwaiti dinars and all figures mentioned during this call are stated in Kuwaiti dinars, unless otherwise specified. Certain statements made today may be forward-looking and are based on current expectations and assumptions. Actual results may differ, pardon me, materially in the future. With that, Mr. Amr, the mic is yours.

Thank you, Fawaz, and good afternoon, everybody. Thank you for joining Mezzan Holdings First Half 2026 Earnings Call. The first half of 2026 has been an important period for Mezzan. It's been an important period for, I think, all operating companies in all parts of the world. We have operated through a challenging regional environment, continued to manage disruptions across shipping and supply routes, protected the availability of essential products across our markets and at the same time, continue to execute on the longer term investments that we believe will shape the next phase of Mezzan's growth. Against this backdrop, I am pleased with the results we are reporting today. For the first 6 months of the year, our Group revenue reached KWD 163.3 million, an increase of 2.7% compared to the same period last year. EBITDA reached KWD 20.8 million, increasing by 9.6%, while net profit increased by 20.8% to KWD 12.7 million. Net profit attributable to the shareholders of the parent company reached KWD 12.1 million, an increase of 21.8% versus last year. What is particularly important to us is the consistency of the business over a longer period of time. Since 2023, we have been building a consistent growth trajectory across the Group, and we intend to keep pushing hard to sustain that progress. Looking specifically at our first half performance from H1 2023 to H1 2026, revenue has grown at a CAGR of 5.2%, gross profit at 10% and a net profit at 24.4%. Net profit for the first half has almost doubled from the KWD 6.6 million in 2023 to KWD 12.7 million in 2026. As we discussed with you during our Q1 call, geopolitical developments in the region created significant disruptions during the first quarter, towards the tail end of the first quarter, particularly around shipping routes, freight availability and logistics costs. Those pressures did not simply disappear after March. Across the first half, we continue to operate in an environment where freight costs, sourcing decisions, inventory lead time and the availability of certain raw material and finished goods required very close management. From an operational perspective, this required a high level of coordination across the Group. During the more critical stages, we moved into a much more intensive operational rhythm across the Group. Teams across the organization were coordinating daily, sometimes hourly, to assess emerging pressure points, review supply and inventory positions and act quickly as conditions change. The response involved the wider organization working together to keep operations running and products available at all time. The objective was straightforward, keep our business operating and keep products available. There was a cost associated with doing that, higher freight and logistics costs as well as pressure on certain input costs contributed to the increase in operating and supply-related costs during the period. For more than 80 years, our business has supplied Kuwait with food, water, health care products and everyday essentials, particularly during periods of uncertainty. We see maintaining that availability as part of our responsibility to our market and our consumer and customers. I would also like to acknowledge the support and close coordination we have received from the Government of Kuwait and the relevant authorities. This cooperation has helped facilitate our response to exceptional logistics and supply chain conditions and supported our efforts to maintain the availability of essential products across the market. I want to highlight our Water business specifically. At Aqua Gulf, our team worked continuously during the period to maintain reliable availability across cooperative societies, hypermarkets, traditional retail channels, home and offices. Given the regional environment, ensuring continuity of supply remain particularly important and our manufacturing and distribution and logistics teams work closely together throughout the period to keep product moving and maintain service levels across all the markets. From there, let me run into Saudi Arabia because this remains one of the most encouraging developments of the Group. In Q1, we reported Saudi revenue growth of 33.8%. For the first half, that growth accelerated further to 43.1% year-on-year. Saudi Arabia now represents 3.2% of Group revenue. It remains relatively small, but the direction is what matters here. This improvement reflects the work being done by our local management team to strengthen commercial execution. We have been increasing distribution coverage, opening new accounts, expanding into additional channels and putting greater discipline around the way we serve the market. What we are seeing now is that this work is beginning to translate into top line growth. There is still work ahead of us, but we are encouraged by the progress. We are also [indiscernible] in Saudi Arabia beyond food distribution. During the period, we began executing selected catering contracts in the Kingdom. We believe catering represents an attractive longer-term opportunity for Mezzan in Saudi Arabia. The team now continues to attract major international culture and sporting events and Mezzan has many years of experience serving large-scale events through our catering businesses in Kuwait and Qatar. Our objective is to take that experience into Saudi Arabia and build the business carefully over time. Regarding our health care business in Q1, we explained that the year-on-year movement in part of our health care business reflected the timing of Ministry of Health tenders rather than change in underlying demand. We continue to manage that tender pipeline closely. More importantly, our longer-term pharmaceutical strategy continues to progress. The development of our Al Shifa pharmaceutical manufacturing facility remained one of the Group's most significant investment. Our plans remain to -- for production in 2027 as previously communicated. We see Al Shifa as much more than additional manufacturing capacity. Together with our established KSPICO business, it is intended to build a much stronger pharmaceutical manufacturing platform in Kuwait. We believe that once completed, Al Shifa can become a world-class pharmaceutical facility and something Kuwait can genuinely be proud of. Another area where we are beginning to see benefits of our investment strategy is Crystal. Since obtaining the commercial manufacturing rights to Crystal brand, we have been focused on strengthening distribution, expanding market coverage and building the brand beyond its traditional footprint. We are now seeing Crystal product reach markets across the GCC and wider Middle East as well as selected markets in Europe and Asia. Our ambition for Crystal also goes beyond hot sauce. We are working on expanding the brand into broader range of sauces, condiments and related products, creating additional opportunities across both existing and new markets. We remain encouraged by the progress so far, and we believe there is considerable more -- there is considerably more value that can be developed from the brand over the coming years. And before I close, I want to step back and put the progress of the last 3 years in perspective. From H1 2023 to H1 2026, revenue increased by 16%, EBITDA by 50% and net profit by 92%. While our manufacturing area increased by 24%, importantly, this progress was delivered through a period of significant operating disruptions. The same period also shows the improvement in margins across the business. Gross margin increased from 21.1% to 24.1%, while the net profit margin moved from 4.7% to 7.8%. For us, this reflects the cumulative impact of pricing, mix and cost disciplines across the Group. So when I look at the first half as a whole, I see a business that has continued to move forward despite a demanding environment -- demanding and challenging environment. We maintained supply continuity. We delivered revenue growth. We increased EBITDA and net profit. Saudi Arabia continued to gain momentum and our strategic investments in pharmaceutical are advancing. There are areas where we still have work to do, particularly around managing the additional costs created by the regional environment and continuing to adjust our supply arrangements where needed. But the organization has shown again that it can respond when conditions change. I will now hand over to my colleague and my partner in this journey, Omar Samoud, our Group CFO, who will take you through the financial performance in detail. Omar, over to you.

Thank you, Amr, and good afternoon, everyone. Let's [ have ] a walk through Mezzan Holding's financial performance for half 1 2026. I will, as a custom, start with revenue by business line, then discuss performance by geography before taking you through profitability, cash flow, balance sheet and debt position. At Group level, revenue reached KWD 163.3 million, increasing by 2.7% compared with KWD 159 million in the first half of 2025. Our Food business line generated revenue of approximately KWD 104.4 million, representing 63.9% of Group revenue and increased by 3.6% year-on-year, a satisfactory achievement in the volatile environment. Our Nonfood business line generated approximately KWD 38.9 million, representing 36.1% of Group revenue and increased by 1.1%. Looking one level deeper within Food, Manufacturing and Distribution remained our largest business, representing 58.4% of total Group revenue, with revenue increasing by approximately 3.7%. Catering represented 4.6% of Group revenue and grew by 3.2%. Services represented approximately 4.9% of Group revenue and delivered positive growth during the period. Within Nonfood, FMCG & Healthcare accounted for 34.5% of Group revenue and increased by 1.2%. Industrials represented approximately 1.6% of Group revenue and declined by 1.8%, mainly hit by restrictions imposed on export during the crisis. Overall, the business line picture remains relatively balanced with growth across both Food and Nonfood segments. Turning to geography. Kuwait remains our largest market, representing 74.4% of Group revenue. Revenue increased by approximately 1% year-on-year despite a very challenging environment. The UAE represents 12.7% of Group revenue and grew by 7.1%. Jordan, including our Iraq venture business serviced through Jordan represented approximately 5.3% of Group revenue and declined by 8.9% on a combined basis. This decline doesn't properly reflect the good growth momentum of our performance in the retail sector in Jordan. The decline mainly originates from [indiscernible] tenders of our venture business. Qatar represented 4.4% of Group revenue and delivered growth of 16.8%, driven by dual growth momentum on our Catering and Retail businesses. Saudi Arabia represented 3.2% of Group revenue and grew by 43.1%, making it the Group's fastest-growing geography market during the period. As Amr mentioned earlier, the Saudi performance reflects the work being done to strengthen our presence and build a sustainable platform for accelerated growth. Turning now to P&L. Revenue increased by 2.7% to KWD 163.3 million. Gross profit was KWD 39.4 million compared with KWD 39.1 million in half 1 2025, representing an increase of approximately 0.6%. Gross margin stood at 24.1% compared with 24.6% in the corresponding period last year, representing a compression of approximately 50 basis points. During the period, the Group experienced higher operating and supply-related costs arising from the ongoing geopolitical volatility in the region, particularly through freight, logistics, supply chain and input cost pressures. The impact of these higher costs was partially offset by the net reversal of the ECL recorded during Q1. At the same time, our business continues to adjust their supply arrangements in response to restrictions affecting the availability and the logistics of certain foods and health care products and essential material. Cost saving initiatives across the Group also helped partially mitigating the cost headwinds. Operating profit reached KWD 16.4 million, an increase of 12.1% year-on-year. Profit before tax and Board remuneration reached approximately KWD 13.8 million. Tax expenses was approximately KWD 1 million, including KWD 913,000 relating to the domestic minimum top-up tax. Net profit for the period reached KWD 12.7 million, an increase of 20.8%. Net profit margin improved to approximately 7.8% compared with 6.6% last year. Net profit attributable to shareholders of the parent company reached KWD 12.1 million, increasing by 21.8%. Basic and diluted earnings per share increased to KWD 0.3877 compared with KWD 0.3183 in half 1 2025. Turning to cash flow. Operating cash flow before working capital changes was approximately KWD 19.3 million compared with KWD 20.4 million in the corresponding period last year. The most important movement came from working capital. Working capital and other movement represented an outflow of approximately KWD 3 million compared with an outflow of around KWD 10.4 million in half 1 2025. This improvement in free cash flow is mainly attributed to a more effective inventory buildup and improvement in payment terms with suppliers. As a result, operating cash flow increased to approximately KWD 16.4 million compared with KWD 10 million last year. Cash used for capital and other investing activity was approximately KWD 8.4 million, reflecting our continuous efforts in line with our investment strategy. This results in a cash flow before financing of approximately KWD 8 million compared with KWD 1.5 million in the first half of last year. After financing movement, the resulting year-to-date increase in net debt was approximately KWD 9.9 million. Operating cash generation improved materially year-on-year. This is important when looking at the balance sheet. As a result, the leverage during half 1 2026 mainly reflects the timing of the annual dividend payment and treasury share purchase rather than a deterioration in operating cash generation. Turning briefly to balance sheet. Total assets on 30 June 2026 stood at KWD 328.3 million. Total equity was approximately KWD 136.7 million compared with KWD 131.1 million on June last year. Net debt stood at approximately KWD 84.3 million, while net debt to equity was 61.7%. Inventory stood at approximately KWD 54.3 million, down from KWD 69.2 million at year-end, reflecting the normalization of inventory position following the strategic stock build we discussed previously. Trade and other receivables stood at approximately KWD 104.7 million, while cash and short-term deposits were approximately KWD 23.9 million. Finally, turning to debt trends. Net debt increased from approximately KWD 74.3 million at December 2025 and KWD 72.2 million in March 2026 to KWD 84.3 million at end of June 2026. As mentioned earlier, this movement largely reflects the annual dividend payment and treasury share purchase during the second quarter. Net debt to EBITDA stood at 2.3x compared with 2x at March 2026 and 2.1x at end of 2025. EBITDA continued to grow, which helped contain the increase in leverage despite the higher absolute level of net debt. We remain focused on balancing 2 priorities: maintaining sufficient financial flexibility and funding the Group's strategic investment program. That concludes my review of the financial results for half 1 2026. Thank you again for joining us today. I'll hand the call back to Fawaz to begin the Q&A session.

Thank you, Omar. Thank you, Amr. Thank you for taking the time to walk us through the first half of the year. We will now begin to go through the submitted questions. [Operator Instructions] Thank you for staying online. We'll be going through the questions. We have a couple of questions; 4 questions from Mr. Mohamad Sakhal. Our approach to these questions is we are going to be asking them one by one so that everyone else can also stay on track and with which questions are we answering. The first question is going to be answered by the CEO. Mohamad asks, given the ongoing geopolitical tensions and shipping disruptions, what proportion of imports was by air during the quarter? And what was the associated incremental cost impact on margins? And the question is going to be answered by the CEO.

Thank you, Mohamad. A very small portion of our inbound finished goods, raw material and so on was airfreighted. And we've done a comparison between air freight, sea freight and when time is sensitive, we took this into account as well. But in general, for instance, one product that where I need to recognize as well, our partners, Kabrita, who helped us actually airfreighting containers, full containers when it was needed because the market here was almost running out of stock. The total cost of war for us so far in the first half was amounting to almost KWD 1.8 million, and this was reflected in our numbers in full.

So the next question for you is also from Mohamad Sakhal and Mohamad is asking, has the cafe business reached the breakdown profitability level? If not, when do you expect it to achieve the breakeven? And what are the key milestones to get there?

Okay. Thank you. Excellent question again, Mohamad. If we assume business as usual, i.e., I do not expand beyond the existing customers, channels, geographies and so on, by the end of this year, I'll breakeven. However, with the encouraging results that we are seeing, the CFO and myself actually are going to be in Riyadh after the weekend, and we are discussing some investment proposal for us to further expand on the success that we have accomplished so far. This investment will obviously come at a price, but it will be a decision that we are taking in the best interest of the business with a long-term view on the full business opportunity Saudi represent to us. So on apple-to-apple, we will break even by the end of this year. If we decide to expand beyond the existing footprint, then this is an investment and it will be taken based on that -- the size of the opportunity and the potential of it. I hope I answered your question, Mohamad.

Thank you. Our next question is this was going to the CFO. The question is from Mohamad, are there any additional provisions that could potentially be reversed in the second half of 2026. And this question has also been asked by Ms. Nada Amin, and that question is going to be answered by the CFO.