NewPrinces S.p.A. (NWL) Earnings Call Transcript & Summary

So good afternoon, everyone, and thank you for joining Newlat Food's First Half 2020 Earnings Call. I'm Benedetta Mastrolia, Investor Relator at Newlat Food. And today, joining me to discuss our results are Angelo Mastrolia, our Chairman; Giuseppe Mastrolia, deputy CEO and Chief Commercial Officer; Rocco Sergi, CFO; and Fabio Fazzari, Group Financial Director. Before commenting on our results, I would like to remind you that this presentation may contain specific statements that are neither reported financial results nor other historical information. Any forward-looking statements are based on Newlat Food's current expectations and assumptions of future events and are subject to various risks and uncertainties that could cause actual results to differ materially from those projected or implied by these statements. Before starting, I would also like to remind you that we don't have an M&A -- Q&A, sorry, a Q&A system. So once we get to the Q&A, I would kindly ask you to just unmute yourself and ask questions in an orderly manner. So before we go straight to the results, I would like to just briefly go through what happened in the last couple of months. So as you know, on 31st March 2020, Newlat Food acquired a majority stake in Centrale del Latte; and Centrale del Latte d'Italia, CLI. And following the acquisition, all first half 2020 figures will be presented on an aggregate basis in this presentation to help understand the actual movement and the actual performance of the group as a whole. And the comparative figures at 30 June 2019, will also include Centrale del Latte from the 1st of January and also Newlat Deutschland. Also, a brief reminder that after closing on 24 July 2020, Newlat Food turnover stake in Centrale del Latte d'Italia of 76.6% -- 67.6%, sorry. As we move to Page 4, we have the key financial highlights. So aggregate revenues were equal to EUR 255.4 million, which were up 5.5% in the first half of 2020 compared to the first half of 2019. We had a double-digit growth in pasta, bakery and special products, and now with the acquisition of CLI, Italy accounts for roughly 69% of revenues, and we had also an underlying organic growth of 3.5%. EBITDA, we look at adjusted EBITDA, which was equal to EUR 23.5 million, and this was an increase of 64.8% versus the first half of 2019. EBITDA margin was 9.2% as opposed to 5.9% in the first half of 2019. And we had very good high double-digit margins in dairy, bakery and special products, as well as an overall increase in all the main business units in terms of margin. Free cash flow, we looked at free cash flow, and we had an overall free cash of EUR 17.6 million in the first half at group level and EBITDA free cash flow conversion was around 75%. So this reinforced the previous trend in cash generation that we've shown in the previous presentations. Net income, we look at adjusted net income, which was EUR 6.9 million versus a loss of EUR 920,000 in the first half of 2019. Our reported net income was actually EUR 26.2 million as a result of a negative goodwill arising from the acquisition of CLI, which is equal to EUR 19.3 million. If we look at net financial position, we had an aggregate net financial position, which was a negative 17.7 million. So net debt 17.7 million as opposed to 35.3 million in the financial year 2019. So we had an overall improvement of 17.7 million in the last 6 months. And excluding IFRS 16 lease liabilities, actually, net financial position would be positive by EUR 1.7 million. If we move to the next page, we have an overview of our sales increase. So as we said, sales increased by 5.5% in the first half of 2020 as opposed to the first half of 2019. And of course, as you can see from the last results call, there was a slowdown in the months after lockdown was lifted. But still the overall increase was above industry average. And this I would say slowdown in the month of June, in particular, was because of retailers that tend to normalize net working capital once the lockdown was lifted as they had a sudden increase in inventory, and they just ordered less as the lockdown was lifted throughout Europe. However, after the closing of the period, we had July and August, which were actually particularly very good -- in a very good position, and they were pretty strong at 6% increase on a year-on-year basis. And in general, we look at cost of goods sold, which shows an improvement, and it was equal to 78.1% of sales as opposed to 80.3% of sales. In general still very good results for the period. If we move to Page 6, we have revenue breakdown by business unit. Now with the acquisition of CLI, I think that's slightly changed, and then pasta became the largest -- second largest business unit in terms of sales, and milk is now our main business unit. Pasta actually increased a lot in the period. It increased 13%, and this was, of course, as a reaction to the COVID-19 situation. There was an increase in pasta consumption all over the world, and there was also partially -- partial contribution of Delverde. The milk segment saw an increase of 1.9%, which showed an overall increase in volumes, particularly. We had a very good performance in the Bakery Products segment, which grew probably organically the highest and grew by 12.9%. Here, we had very good performance in the market, especially in the Italian market with higher sales volumes and very low promotional activity. In terms of dairy products, these increased by 2.4% in the period. So still a good increase, and special products increased 12.6% as a result of the price negotiations with Kraft Heinz and also the entry of new customers in our Special Products division. Other products, which are commercialized products or usually products that are not produced by Newlat but they are just commercialized and that are sold in the food service channel mainly decreased of course as a consequence of the lockdown and restaurants being closed all over. But in terms of unitary values, not as evident in the profit and loss. If we move to the next page, we have the revenue breakdown by distribution channel. So the large-scale retail distribution channel increased by 9.4% in the period. So this was, of course, due to an overall increase in sales in this period. B2B partners also remained pretty stable with an increase of 0.3%. Then we had normal trade, which was slightly impacted in the first quarter by the COVID-19 lockdown, and it was negative 0.8%, but it saw progressively an improvement in the last few months. We have private label as well, which increased by 4.5%. As a consequence of new contracts and more sales volumes. And then, of course, food service was the channel that was impacted the most in this period, and it decreased by 13.3%. If we move to the next page, so Page 8, we have the revenue breakdown by geography. As I mentioned now, Italy is around 70% of our sales with the inclusion of CLI. And Germany, however, still remains the second largest market by far, with 18% of share in our portfolio. Revenues in Italy went up as an overall increase in sales in the period by 3.6%. However, the market that performed the most, the best in the last 6 months was actually Germany, which saw an increase of 11.1%. We actually had the best -- the month of July was the best performing month in the last 6 years in Germany in terms of pasta sales, which saw an increase of 80% on a year-to-year basis. There was very good performance overall. And of course after, no closing of the period, but still a very good performance overall, even during the period. And then we have other countries, which also saw a good increase of 8.8%. And this was, again, thanks to an increased consumption overall worldwide of pasta and other long like shelf life stable products. If we move to Page 9, we have the EBITDA breakdown by business unit. So as we said, adjusted EBITDA went up to EUR 23.5 million in the first half of 2020. This was a very good increase of almost 65%, so 64.8% versus the first half of 2019. And an EBITDA margin improvement, which almost doubled and went to 9.2% compared to 5.9% in the first half of 2019. And this trend, of course, it was also shown in the last presentations and this trend kind of keeps on at the ambition and the goal to reach a double-digit margin overall in the next couple of years. The margin improvement was, of course, also a result of the quick implementation of synergies that we had in the second quarter of the year with Centrale del Latte d'Italia, which has shown -- If you look at the marginality of milk. It went from 4% to 9.6%. So it was a great increase in overall EBITDA margin improvement. And we still have very good high margins in all the other business units, especially in bakery, dairy and special products, which all record high double-digit margins. Especially Bakery is still our -- bakery and dairy are still our best-performing segments in terms of marginality. Now we move to the next page where we have EBIT and net profit breakdown. Here, we are showing you the effects that the acquisition actually had on our profit and loss statement, especially on the EBIT net profit figures, as they were both impacted it in a positive way by the negative goodwill arising from the CLI acquisition, which you can see here, pointed by the arrow, which is EUR 19.3 million. And so we normalize here the -- you can see the normalized EBIT, which was 11.2 million, which represents 4.4% of sales. And it was also a very good improvement since last year, and it went up 522%. We also would like to underline the effective tax rate was 26.7%. And net profit for the period was 26.2 million. If we exclude, of course, the -- and we adjust the net profit for the income from the CLI acquisition, we actually had an adjusted net profit of EUR 6.9 million, which is also an extremely important milestone as we went from a negative 920,000 loss in June 2019 to a very positive results in this first half. We also highlight here at the bottom of the page, on the right bottom that we have noncontrolling interest as a result of the CLI acquisition, which were equal to 1.13 million in the first half. However, after the PTO, which resulted in Newlat's owning 67%, 68% of CLI, we expect that minorities will have a lower impact of around 32.4% in the second half of the year. Now we move to the net working capital and figures. So as you can see here from the pictures from the table, we have a very good performance in terms of net working capital and cash conversion cycle, which improved in the period. So we had an overall improvement in DSO, which went from 50 days to 60 -- sorry, which went from 68 days to 50 days in 2020. DPO was 140 versus 138, and these 2 were especially important achievements as they were reached through our strong relationship with key accounts and with customers. Inventories outstanding also improved. And we had -- in general, we had a very good inventory turnover, which went up to 9.1 versus 8.6 in the first half of 2019. The main figure that you will notice that change in the period was inventory as it went up to 44.2 million in the period as opposed to 29.9 million last -- first half last year. This was mainly due to an opportunity that we took as there was a general decrease in raw material prices, especially in the UHT milk and in the milk raw material prices. So we took the chance in as company policy, we usually take advantage of the raw material price decrease to stock up on more long shelf life products. So there was a variation in that sense, but that's, I would say, normal in that sense. And in general, net working capital was pretty in line, considering higher sales as well. Now we move to the next page, Page 12, where we have the free cash flow and cash flow statement. As we already said, we have a very good cash conversion ability, which is shown both at group level and also on a stand-alone level, both for CLI and Newlat Food. As you can see in the red circles, here, we have free cash flow for CLI, with 7.8 million, which means that the EBITDA free cash flow conversion post tax was actually 81.3 million. This is an extremely important figure for us as it shows a CLI and now is able to actually -- the leverage on its own without the help of Newlat. And overall, on an overall group level, we also had a free cash flow conversion of 75%, extremely high on a group level as well. We have the last slide, which is the analyst consensus slide where we summed up the forecast of the -- of our analysts for the next 2 years. And we signed up the 6 figures, but which we consider the main performance indicators for the period that you can read yourself. So we do, as a management, we do see that these expectations will be met. And we are extremely confident that this will continue even in 2021. And in general, we would like to just reinforce our commitment to reach the goals in 2020 and 2021. And that's our commitment for the future. And that's really it. So presentation is over, and now we can go to Q&A. As I said, you can ask questions. Just unmute yourself and ask questions as you like. Thank you.

It's David Hayes from Soc Gen. Just 2 from us. I think start off with. Just in terms of -- just trying to reconcile all the numbers. The Slide 12 table, which is very useful where you break out Newlat and CLI and then the combination. Have you got the sales numbers for Newlat first half '20 stand-alone and CLI '20-stand-alone. So that affected the line above the adjusted EBITDA. And then the second question was, it looks like CLI EBITDA has gone from EUR 2 million last year, first half of '19 to 9.7 million according to that table in the first half of '20 so 7.7 million of growth. We're assuming that's got quite a lot of synergy benefits in that 7.7 million. So I just wonder whether you can talk about the synergies that have already appeared in the first half and whether the same level of synergy and profit development is likely from CLI in the second half.

Okay, I can start with second question, and then we will provide also to you the number of CLI having saying that CLI published its numbers during the day separately because they are also listed in the star segment. So it's quite easy for everyone to do the calculation. About the contribution of synergies, I think that it's very important to highlight that in the second quarter of the year, we reached a lot of goals in terms of synergies because we substantially implement very soon, implemented very soon and very quickly most of the synergies, in particular, on the cost side. And we mentioned also in the release the negotiation of the supply contracts for raw material, but also in packaging, in particular, we renegotiated -- we negotiated an important contract. And we got also other different synergies on the commercial side where we strengthen the structure and the approach also of the sales force. And when we start announcing the acquisition of CLI we told to the market that we expect the company to realize around 10 million synergies, 10 million improvement from the 6.3 million they reported last year in terms of EBITDA. I think that we are probably maybe in advance versus our expectations to realize this lot of synergies in 12 months, because we believe that we can get this goal until the end of the year. And this means that substantially, we expect a similar trend in terms of EBITDA in the second half to reach for CLI at least EUR 16 million of EBITDA. In the second half, we expected to have an additional support in terms of synergies because, as you probably know, on July 20, we finalized the merger of the 3 entities in CLI. Today, we have only 1 company, Centrale del Latte d'Italia, and this obviously will have an effect in terms of cost reduction also in the second part of the year. All in all, the message is that most of the improvement that you can see in the second quarter in terms of profitability is related to a better than expected in terms of timing performance in terms of synergies.

I've got a few questions, if I may. This is Arianna. Okay. My first question is on organic growth. Sorry, perhaps we didn't go one by one. The organic growth of 3.5% this period, can you split it between Newlat and CLI?

Yes, CLI got 3.5% increase in organic terms in the second quarter. And the movement on the organic terms for Newlat was flat in the second quarter. CLI realized, as you probably remember, an 8% increase in Q1 and Newlat got 6.8% increase in Q1. And the performance of the second quarter is mainly related to -- so the decline of the second quarter is mainly related to normalization -- a material normalization that we experienced in June when at the end of the first half, all the retailers after the strong investments in working capital they made in the previous months, decided to stop the orders to protect, thinking about the end of the semester, the working capital. And this is also the reason why, starting from July, we experienced another acceleration of orders. And the 6% that we mentioned is more or less the same performance for CLI and for Newlat in July and August.

Okay. And do you have any expectations for the full year? How do you see the dynamics of the market?

We said already that -- so the market spent 3.8 to 3.9, it depends if you want to consider the average of the medium. We think that this level of organic growth is achievable. And we don't want to give other messages because the environment is volatile month by month due to these extraordinary situations that we are facing. We are confident and we have visibility that this level of organic growth is achievable. And if we will reach something more, we will be happy, but we don't want to give any precise guidance.

Okay. And then in terms of the performance across the different categories, I look at the performance of bakery, which was exceptionally good in terms of top line and profitability as well. Is there anything that has been favoring you during the lockdowns? And do you think this is going to reverse over the second half?

You just an introduction, and then I leave to -- use that to explain you in details this particular situation that is very interesting. What I can say you -- what I can tell you generally is that we are very focused on bakery and on special products because our 2 very important categories with high profitability and we want to increase the weight of these categories on total revenues. So we expect to continue this trend. But I think that Giuseppe can give you more colors on this.

Yes. So thank you. Thank you, Fabio. Thank you, Arianna, and also on the growth that we had on the bakery, I can tell you that the growth not driven by only by the situation of COVID that we had in the last month, but we are still continuing. Now I have in front of me the market data from the -- that we have every month updated to August data. And I can see that we are the most increasing in term of bakery products I'm talking about. We have the -- mainly the first growing company in terms of bakery products with a percentage of growing in terms of value and volume that is quite the same. And we are the more, let's say, we have the best result on the market. We are achieving new market share, so market quota on market share because we have a quite strong market share. We are launching new products as well in the market. We have 2 [ star ] categories just to let you understand. We are on the last on the bread substitute. We are the second player the bread substitute. They are growing really, really fast and really strong, but without any kind of promotional activity. So the rotation of the products is the highest rotation products on the shelf in the [indiscernible] countries. So in the bread substitute segment by itself. So just with the 3 SKUs, we are the second player on the market. Imagine that the first player has overall around 20 SKUs. And so I can tell you that the growth is still increasing due to the fact that the consumers are appreciating more and more of the product and the rotation is going really good. Now our goals in the next months is that we want to improve. We build up a new SKU on the bread substitute. We are trying to reach all the customers with these third SKUs. And the feedback is quite positive until now on this new SKUs with a multi-cereal recipe. And then we are launching a new, really innovative packaging on rusks. So on the [indiscernible]. And we are confident that we can gain good market share that will not, let's say, cover the actual market share because we are in a competition side that is certainly different from the current one. So we are proposing a new service level of rusks with this new launch that will be done in end of September, beginning of October. And I think and I hope that all the plans that we are doing in this business will be respected. I'm quite confident that everything would be respected. Another thing that I want to underline the growth in parcel is really strong. And I can tell that on the sales side, during the COVID, we had really extraordinary attitude with our customer. We didn't lose any customer in this period because we used to have a fair share idea. So we serve all our customers in the best way as possible. And so this pay us back in terms of, let's say, relationship with the customers. That's why there's a bit of private label that is increasing because most of the customers saw that Newlat has a really good attitude with the customers. So they -- compared with other competitors in past and even in other products if we want to be their partner even on this segment because they saw the loyalty and the attitude that was really positive. I can tell you, continuing on the revenue breakdown by business unit that, as you see, special products increased a lot as well. And the dairy products and the dairy products gave us really good satisfaction during this period, even if the dairy business was not so satisfying. But in general, but for Newlat mascarpone growth is -- mascarpone mainly is really strong growth compared with the market with what is doing Parmigiano Reggiano that kind of Italian cheeses all around the world. So as an answer to your question, yes, the bakery products, this is not 1 stand-alone situation, but this is a situation that is still growing. I'm confident that at the end of the year, this new launch will be good. And that the trend is not stopping. I can tell you that the trend of the growing is not stopping even during July and August about bakery.

Okay, and did you launch Delverde the new line, the new sort of line...