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

Okay. So good afternoon, everyone, and thank you for joining today's call on Newlat Food 9 months results for the year 2020. Joining me today, we have 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 certain forward-looking 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 actually cause actual results to differ materially from the projected or implied by these statements. So we move straight into the presentation on Page 3, where we have highlighted some key messages that we would like to share with you before commenting the results. And as -- the year 2020 has been a year of challenges for everyone. We wanted to highlight some of the key aspects that have characterized our business in the last 9 months and that has shown to be a strength point for us. So first of all, of course, is the resiliency of our business and our business model. And in fact, we've been in the last 9 months as you've seen in the previous results calls, we've been able to actually adapt to these challenges to actually take advantage of these challenges [indiscernible] in sales in this period despite of the problems associated with the pandemic. We've also had the very dynamic approach to business as you will see later on that we've sort of supplied some of the key product launches that we had in the last 9 months. So we've been really active in the business development and commercial strategy of the company, which has been strengthened even with the entry of Centrale del Latte d’Italia last March. And as you've seen probably from the numbers, there has been an actually very good successful implementation of the synergies with Centrale del Latte d’Italia, which have -- at the moment, they're exceeding our previous expectations before the acquisition. So we're really happy about that. And also, you have seen, and you will see that we have been able to generate cash at group level and also on a stand-alone basis for Newlat Food and Centrale del Latte d’Italia, which has been really positive for us. So we've been able to convert most our EBITDA into cash, into free cash. And that's always been one of our strength points in the past and is confirming to be one of the key points for us. And of course, the very last point that we wanted to remark is that we have really dedicated to M&A. We are always engaged in looking at new deals, new opportunities in the market, and we really hope to close, hopefully, a new deal in the next couple of months. Now I'll just jump on to the key financial highlights. As you know, we like to look at the aggregate revenues. So to sort of give you an idea of where we are in the group level. So we will see -- you will see the pro forma aggregate revenues for '19 and 2020. So revenues were at EUR 372.7 million plus 5.4% versus the first 9 months of 2019. We had a very good growth in the Pasta, Bakery and Special Products segment. And Germany in particular is the region performed really well. So we actually had a growth of 14.5% in that particular country. And we're really happy about the -- our performance in that particular market. And we also had an underlying organic growth of 4%. EBITDA was also one of our, I would say, best successes in the last 9 months. So we've actually been able to increase our -- to double basically our EBITDA, and we went -- we actually recorded EUR 37.8 million in EBITDA, and we finally reached our -- the thing that we've been dreaming of the last year -- in the last year, which was the 10% EBITDA margin. So now we have 10.2% EBITDA margin versus the 6.8% EBITDA margin of last year. And we have very good performances in most of our business units. So that's milk, dairy, bakery and special products. They will have double-digit margins. Some of them are higher, some of them are lower, but still very good margins. Free cash flow also was very good. So we generated EUR 30.8 million of free cash flow. And as I said, the EBITDA and free cash flow from operation was 81.5%. Net income -- I think there's some noise, I'm sorry, I'll just try to unmute. Okay. Okay. Now it's better. And then there's -- and the net income for the period was equal to EUR 30.5 million. And of course, that is the reported net income, and the adjusted net income was EUR 11.3 million versus EUR 2.15 million in the first 9 months of 2019. This was, again, after deducting the EUR 19.3 million of negative goodwill that you saw already in the first half presentation. Net financial position, of course, also improved as a result of the free cash flow generation and the very good performance. And we now have a net financial position of negative EUR 8.8 million versus a negative EUR 35.3 million at the financial year 2019. So of course, this is our pro forma with the Centrale del Latte consolidation scope. And without the IFRS 16 lease liabilities, net financial position is actually positive. And we had a net financial position of EUR 8.4 million. Now we move on to something that we would like to share with you because we like to sort of put things into perspective and to let you see what's behind all these numbers. So we share some of the key -- some of the key launches and some of the key commercial initiatives that we had in the last 9 months. These were also launched in the last, I would say, in the 3, 4 months probably. One of them is the pre-portioned snacks as I called it here. It's -- we launched the Granfetta, which is our rusks brand with the [indiscernible] Sansepolcro factory. So as you can see, we've actually successfully implemented the serve transition from the Buitoni to Sansepolcro factory branding. And we launched this particular [ SKU ], which caters to a new -- to a different -- I would say, different consumer needs, which is the need to have something to snack on even if you're at work or it's really good, for example, for hotels and for sort of food service. I know food service is not the best example at this moment, but it's really good in that particular area. Then we've also launched some new products that sort of supporting the local businesses. So for example, with the Mugello and the Centrale del Latte Salerno, Latte del Parco. What we do here is we collect the milk from local farmers. So everything is procured from local farmers and the -- this is to sort of incentivize the local production to premiumize about the production and our products in those particular regions. So these are very regional, I would say, even very linked to a particular specific area of the region, for example, Mugello or Parco [indiscernible] near Salerno. And these products are also -- the packaging is also sustainable. So we use recyclable packaging. It's really, really exciting, really [indiscernible]. We've also launched our mascarpone with Amazon. So we're producing the Amazon mascarpone. That's the only feature I add, but it's really exciting project maybe later on, we can give you more details about it. We also ran some healthy snacks with Mukki, where -- when we launched the snacks for kids. So we have sugar portion control and [indiscernible] controlled snacks. So they are all below 200 calories, which is really good for kids. We're really happy about the -- chocolate biscuits are really good. We've also launched Delverde in Germany successfully, I would say. We've been launching [indiscernible] retailers, and we also are finally launching, I think, by the start of the year of 2022 -- or 2021, we will launch the new Delverde packaging in Italy, which is the 100% Italian wheat product, which is really a big request here in Italy. So we've jumped on that sort of consumer need. And also, we've been developing some protein and vitamin enriched drinks. So for example, here, we have the Mukki Donna, Special Donna which is a milk stuff for women who sometimes are deficient in some particular vitamins or some particular nutritional -- nutritionals. So that's what it does. And also, we have a sports drink with the protein -- with 25 grams of protein. Really quickly, and then we'll go on to the numbers. So here, we have some of our market share indication in the bread substitute market. So as you know, Crostino Integrale -- Crostino Dorato and Crostino Integrale have been really successful in the last couple of months, and it's been even more so in the last 9 months where [indiscernible] has been a thing. And here, I just wanted to show you that we -- I think here in Italy, you've probably seen that we've launched the [ Double ] branding again, so the Sansepolcro and Buitoni are co-branding, which has been working really well for us. So we have a 12.5% revenue growth in the year-to-date 2020 as opposed to a market that grows by 4.7%. So we've been tripling the performance as opposed to the market performance, we're really happy about it, and it's a product that really is performing really well. And we have confirmed our position as the second largest producer after Barilla -- of course, there's a private label, but we are the second largest producer in terms of branded products. Now we move on to the actual results. So as we've already said, the revenue went from EUR 353.6 million to EUR 372.7 million. Hence, with a revenue increase of 5.4%. We have seen also an improvement again of the cost of goods sold, which was equal to 77.4% as opposed to 80.1%. This is, again, something that was initiated in the -- at the beginning of the year, but we've really been where you have cost and cost structures that we've been optimizing these cost structures and the procurement policy between Newlat and Centrale del Latte d’Italia as well. [indiscernible] prepared a server bridge, server waterfall graph to show you the actual organic growth that we've had both in Newlat Food stand-alone level and Centrale del Latte d’Italia stand-alone level. So you can see the underlying growth. So we started with the pro forma revenues at 9 months 2019, which included Delverde in Newlat Deutschland from the January 1, 2019 to give you sort of a basis point. And we've included the sort of the acquired revenue from Centrale del Latte d’Italia. And then we have the actual organic growth of Newlat Food, which is 4.35%; and the organic growth with Centrale del Latte d’Italia, which is 3.3%, which overall gives us an average organic growth at group level of 4%. We've included also foreign exchanges for UTC that we haven't really been -- we're not usually impacted by foreign exchange, and that's just to give you this idea. And of course, then we get to the EUR 372.7 million in revenues, which overall represents a 63.9% of increase in sales. Here, we also wanted to sort of go really in depth into the organic growth trends, both at Newlat Food level and Centrale del Latte d’Italia level. So to sort of assure you that we've been having a really good year and a really good performance, both at Newlat Food level and Centrale del Latte d’Italia. So as you can see on -- sorry -- I won't go too much into detail. But as you can see, we've had a very good performance in all the quarters. Of course, Newlat in first -- in the second quarter, sorry, was slightly impacted by the reopening of businesses and the fact that retailers wanted to resize their inventory levels of 30 [indiscernible] happen in the first quarter. But we had a really good pickup in -- we've [ had very good ] pick up in the third quarter with 9.4% of increase compared to quarter 3 of 2019. And overall, we had a sort of a cumulative increase, which was very positive. So we had an overall today of 4.35% of increase at the 9-month 2020. We're going to do Centrale del Latte d’Italia trends. We see they also had a pretty good organic growth, both at quarter level and at a cumulative level, they had a really good first and second quarter. The third quarter, unfortunately, since it was the summer period, it was impacted by the slowdown in tourist in Florence, [indiscernible] the major cities where we operate with Centrale del Latte d’Italia. Nonetheless at group level, with Newlat, we've been able to serve balance data out. So we didn't really see any material problems. When we add -- and then again, you can see that the overall average organic growth for Centrale del Latte d’Italia was very positive at 3.3% at the 9-month point. Then we did the same thing for EBITDA growth. So just to give you again an understanding of what goes on even at EBITDA level, which I think has been one of the best, I would say, best figures to look at because it really shows the improvements that we've had in the last months. So Newlat Food performed really well as well, especially in the last quarter. We had a really good sort of management of the cost -- of the cost, which helps us gain 65% of EBITDA since -- compared to the third quarter of 2019, same goes with the cumulative growth, which was 29% at 9 months 2020. And then we're going to Centrale del Latte d’Italia, which, of course, is the worst, I would say, -- worst spaces to start with. So they had a really good increase in the first 2 quarters and even in the third quarter. So one thing that we're really happy about is that although the company probably, as you see here, they didn't perform extremely well in the third quarter. They were actually able to double -- basically more than double their EBITDA level in the third quarter. And this gives an overall increase in EBITDA of 197% for Centrale del Latte d’Italia the 9 months point. Then we move on to the usual breakdown by business unit. So Pasta had a really good performance in the period. We had an extremely good performance in the German market, as I already said, and where we launched Delverde but also all of our brands that already existed in the market were really performing really well and they've been really successful in Germany. Milk products had sort of a slowdown, as I said, in the third quarter because of the tourism that went down. But we had 2 opposite trends. So one was the sale increase in the large scale retailers, which was still a thing, also then we had the negative impact of tourism and sort of lockdown restrictions that are going on around Europe. Bakery also saw, as we already saw a very good increase in sales, dairy products increased by 1.6%, releasable increase in the last couple of quarters and special products also increased by 11.4%, again, as a result of the pricing negotiations with Kraft-Heinz. And of course, other products saw a decrease because we sell other products or the commercialized products through the food service channel. So these are silos or products that we source from somewhere else and we just commercialize. So that don't really have a good -- like a big impact on our sales overall because it only accounts for 3% of our revenues. Now -- then we have the revenue breakdown by channel. So as we said, the -- of course, the large-scale retailer channel saw a major increase, especially in the first couple of quarters. But it really -- showed a really good increase of 8.7%. B2B partners also increased by 3.3%. And the normal trade, private label sort of stayed in line with the previous period. And food service, of course, was impacted by the COVID-19 situation. But again, this also doesn't account for much because it's less than 3% of our revenues. Then we move on to the breakdown by geography. As we already mentioned, Germany performed really well in the period. Italy also went up by 2.5% due to an increase in overall sales in most categories. But Germany really performed well because of as we said, of the pasta, especially of the pasta sales. Other countries also increased a lot by 7.9%, so 8% increase, mainly thanks to the pasta and sort of the shop stable products, which is -- we see sort of a tendency to buy more of this shop stable launch of life products in this period. EBITDA breakdown. I think we sort of went through this at a higher level, but we had a really good also performance in the EBITDA -- adjusted EBITDA that we look at, which was increased by 58%. And we -- as we said, we reached a double-digit EBITDA margin. Our best, I would say, performance margins were -- where the -- outperforming the business units were the bakery, dairy, special products and also the milk finally went from 4.5% to 10.2%. So really good performance there. Okay. And then we just give you a brief breakdown of the profit and loss statement of the Income segment. To remind you that we had the impact of the income arising from business combination so that the badwill that we had with the acquisition of Centrale del Latte d’Italia. And we had an EBIT of EUR 37.9 million compared to EUR 5.6 million. Of course, that's a big jump, but we also had a very good net profit. For example, we had EUR 30.5 million at reported sort of basis, but then we had an adjusted net profit which was really good anyway, which was EUR 11.3 million as opposed to EUR 2.15 million. We just highlighted here that the noncontrolling interest was equal to EUR 1.05 million. Now we move on to the free cash flow, which is [ prettty ] interesting to look at, especially for Centrale del Latte d’Italia. And so we've just like -- for the first half results, we sort of have the 2 problems for Newlat Food and Centrale del Latte d’Italia, and that's the consolidated results -- figures. So as you can see here, Centrale del Latte d’Italia had very good performance even despite the fact that they had, again, the slight decrease in sales, they had a really good performance, and they generated EUR 12.4 million of free cash flow with an EBITDA free cash flow conversion of 90.9%, which is really good. So this shows the ability to gain once again as they did in the first half to generate cash to repay their debt or having to sort of Newlat Food to take any sort of active role in that because they're really independent in that sense, they can deleverage without the financial help of anyone else. And then we just move on to our key message -- our final messages here. So we would like to sort of underlying that we think we will be coherent with the market expectation of 3.3% to 3.5% of organic growth in this -- in 2020. And we've also seen that the further optimizations that will come from Newlat Food and Centrale del Latte d’Italia, which saw a few sort of improvements even after the merger of Centrale del Latte -- the Vicenza and Centrale del Latte della Toscana. And we think that these 2 factors will really have improved even more profitability in this particular year. We also want to underline again that we are continuously focusing on M&A targets, and we are really excited that we can definitely -- we think at least that we can close the deal by 2021. And really last message that I would like to share is that we think, we reassure, and we reiterate the fact that the company will meet the analyst expectations for the years 2020 and 2021. Okay. So I'll move to the Q&A now. So what we do is, as usual, if you want to unmute yourself and ask questions or if you want to maybe sign a question through the chart, you can do so. And please go ahead with your questions.

[indiscernible] Can you hear me?

Yes.

Yes.

So I have a few questions. First, on your organic sales growth guidance for the year, 3.3% to 3.5%. It sounds a bit low given that you've done 4% over the 9 months. And given that Q4 is the quarter for 7 waves, so maybe more restocking, maybe less restaurants and more supermarkets. So why are you so cautious about the Q4?

Good afternoon. No, it's just maybe it's better to highlight that and to stress that we usually -- we are not giving guidance, and this is not the guidance. Just we want to say that considering what kind of expectations we see in the market. And if we consider the consensus expectation in terms of organic growth, we are absolutely confident that we are going to meet this level, these expectations that the market has. It's not a guidance. Obviously, we are going on very well. We are increasing quarter-by-quarter, also the level of organic growth for what we are seeing today, the situation is going on substantially in line for what we saw also in the past quarter, and we are absolutely confident to continue to deliver a good level of growth this year. Our comment is only related to our confidence about the market expectation, not the guidance.

Okay. Can -- well, the Q3 margins were really record high across all segments. Is it sustainable? Or is it some portion of one-off and tailwind like, I don't know, seasonality, some more promotion than last year, maybe a good mix across channel distributions. Can you explain a bit more this exceptional margins across segments?

Benedetta, can you share the presentation with the slide that is concerning the questions, please? So we can be all on track on that question.

We're talking about the -- sorry. I think this -- where is it?

We can speak also considering the progression because I think that the most important item that must be take into account to explain the margin improvement, especially for women food, is absolutely amazing [indiscernible] growth that we realized in Q3. Newlat Food grew 9.4% organically in Q3. And this obviously explain the operating leverage that also was the main driver for our profitability. This is sustainable in the sense that with this level of volume of growth, we can generate this level of profitability. And this is related to what we mentioned also 1 year ago at the time of the IPO. So the fact that our industrial structure is absolutely ready to support additional volumes. And through these additional volumes, we can generate our economies of scales and operating margin improvement. This is the proof that when we get additional volume into the market through the initiatives that also Benedetta explained before, we can leverage our structure and achieving the improvement of profitability that we also mentioned explaining our equity case 1 year ago.

Okay. And just the last one for me. In terms of organic growth, as you mentioned that Q3 was particularly strong, how much is coming from new projects that you highlighted in your introduction? How much is coming just from cannibalizing on old brands and all products.

So maybe you can go on the initiatives, there it is just to show, which are the commercial initiatives, just to explain a little bit about that. So these are all things that we are launching in the next future for the Pre-Portioned Snacks, for example, something that is coming up now will be additional to the current business and will not -- we do not take part of our current business because we are talking about taking part of a business that is made by our competitors. So there was some competitors to give a product -- a similar product, Pre-Portioned Snacks. So our idea is to gain new market share about just giving you an [indiscernible] every one of these products. So it's not -- for example, these snacks are not cannibalizing, nothing about the listings into the retail channel and is implementing given our opportunity into the food service because this product has a really high service level. And this product is really interesting even for exporting more and more even the bakery products because we have a long shelf platform on this product. So the first, the Pre-Portioned Snacks, is something that will be additional volume that is not in the 9 months' figures that you see. So the launch is now and we are already listing it in some Italian retailers, and we will see maybe the result in the next 3, 6 months of what we have been planned. Talking about the other opportunity that you see is everything I can say, additional, we prove the sustainability and supporting open business. So these are new milk segments that we want to -- that are additionally on the market. What we can see is that with our current service level with our milk extension, we have over 200 trucks delivering every day to the shops in Italy. We can gain a new position into the shelf compared with our competitors. And the idea is to implement as much as possible, the offer for such kind of segments because of 2 motivations, one is because of margins, of course, because we can -- as much added value you give to a product that is produced nearby your hometown as much to your -- the trust in the raw material and in the company and in the brand. And as much you leave the buying, the purchasing from other companies that are making the opposite strategy. So to give an idea of a faraway company. So -- and this is -- so these are additional plus that we are giving, and they are giving us even the opportunity to enter in -- we are the first one with the milk that is -- you see the first Mukki milk, the blue one is 100% plastic free, the first 100% plastic free because it comes from sugar, all the packaging, even the cap. So it's an initiative that gives us a branded value even in terms of innovation. And this totally new is a sort of new product that is going on the market. The other initiative that you see, we highlight mascarpone by Amazon why because we want to understand that Newlat is a reliable company in the market, and we get the contract to start with Amazon, the adventure of the fresh food. So this is the fresh -- the first mascarpone that the Amazon launched in the market. And we are the supplier. So that's good for us. We are not doing big -- they are implementing now a business of fresh food, delivering fresh foods. So for them is quite new in Europe, but we are the first supplier with the mascarpone under their own brand. And so we hope to get into this online shares as well, and this is a total new market for fresh products. So no fresh products are working a lot online, but through Amazon, we hope and we see that maybe volumes can come in. Then you can see that we are diversifying our portfolio with the Healthy Snacks for kids, for example, and about them where they is all additional because before our purchasing of the plant of Delverde, it was not into the German market. It represented just a niche, and now we are launching it on the whole market, we gained the most important listing on the German market that is the [indiscernible]. So we will see in the next months what will happen with the opportunity of volumes where we want to launch it as much as possible as a high level product is really important for the consumer, the quantity of protein and the reliability of the brand. And in Italy as well, we are relaunching the brand with an added value of 100% Italian wheat. So initiatives about the raw material. And last but not least, we are the first company that is introducing milk for -- first milk company that is introducing this special recipe that does not exist on the market. We just saw something that is far away like in Australia and New Zealand. Let's say, we call it Mukki Donna that is for segment for women's with the added phosphorous, vitamins and magnesium, I think. So -- and milk-based drink for sports people that do sports. So everything you see on this slide is everything additional. And our growth I can tell you that it's due to achieving our new customers and even, of course, of new projects that are coming up. But as I said at the beginning, all these -- most of these projects are still -- are not on the market already. So this will be everything out and new for the market in the next months.

Okay. So your organic growth in Q3 is due to new customers and new projects, new products? I'm not sure...sorry.

We -- are launching new products. We have the new projects in general will be with customers. But of these key projects, the only one that is already on the market is the mascarpone by Amazon and the Healthy Snacks for kids and the Pre-Portioned Snacks are going out this month as the milk sustainability and supporting local business are way now this month. So you can see the result in the next months.

Okay. And maybe can we have an update on 2 more things. Maybe on the baby milk contract and also on your M&A activities, unfortunately, couldn't go further with the harvest or you own other projects or the imminent or that were on the long term?

I [indiscernible] .

About the contract, I didn't get you are referring which contract?

The baby milk, going international with baby milk contract where...

Yes, this was -- we signed some contracts in the summer for baby food. And the project will start in January 2021. So we are quite ready to start with this project, and we need due to the very high diversification in terms also of countries that we need, on average, 2 years [indiscernible] 3 years to cover all the contracts. But everything is going on as we already explained during the first half presentation. Unfortunately, we can go in some details because we signed a confidential agreement with the counterpart, and we can share a lot of details, but everything is going on. And in 3 years, we will be as a, I would say, forward in terms of execution of the new contracts. In terms of Hovis, as you probably read, Hovis was sold to the Endless private equity last Friday in the line between Thursday and Friday. This was a process in which we were involved until the last week, we are very disciplinated in the M&A approach, and I think that even if we were not successful in buying Hovis, I think that our shareholders could find 2 important messages in this experience. The first one is the fact that we are really focused in M&A, and we want to find an interesting target to be also more international. And we are looking for other targets. We already are -- we already have on the desk other targets that could help us to diversify our business in Central and Northern Europe. And this is the first point. The second one is the fact that we are committed in M&A, but we don't want to do a [indiscernible] because we need to do a deal. If there are -- the condition to do a deal and to put the base on which we can create value for our shareholders, we are very happy to go on and to sign the deal. But as it is in the case of Hovis, we made an offer. And we were not able to increase our offer and to continue in these competitions with the other counterpart because we analyze the target and we realized that, that was the price. Otherwise, we can be focused on other one because on this, I want to highlight, once again, we are very, very disciplinated, and we don't want to do a deal only because we promised that we are looking for a [indiscernible]. So this is just a comment that I can give you -- I can share with you about the Hovis experience.

Can I ask a question?

Yes.

This is the Doriana Russo from HSBC. Thank you very much for taking my questions. First of all, apologies because I was a bit late, and I couldn't download the presentation. So I might ask a question that has already been asked. Obviously, across all the different divisions, you have had tremendous performance, top line and bottom line. The lagger seems to be the Milk and Dairy division. I think you mentioned that because of the low tourists in Q3. Can you explain it a little bit better, why would those 2 divisions be more exposed than the other one? So that's my first question. I've got several.

First of all, I can tell you, Doriana, that speaking especially about the business of CLI, the division differently by Newlat is exposed to the HoReCa and especially speaking about particular region like Tuscany, like Liguria, for example. You know that for the coast and also for the cities, the tourist is very important. This year, most of the hotels in Tuscany and Liguria [ signed ] minus 70% in terms of booking. And this obviously is a direct impact on the orders that we receive in that regions from -- in the HoReCa segment. The other point is that we -- our experience substantially has situations with a bit of volatility this year because we experienced a very strong Q1 and Q2 absorb the exceptional effect linked to the COVID is especially in Newlat, as you can see in the chart when we realized an organic is slightly negative in Q2. In Q3, the business got a very important rebound not in milk, but I think that this is a combination of several situations that also characterized the sector because now we have on the table, a lot of diversifications, new product launches to try to stimulate the demand in this segment. But obviously, as you can imagine, is not a business characterized in general with a particular high organic growth. And I think that it's quite normal for us to see this business developing in terms of revenues at this level. The business in which we are betting for a strong contribution in terms of organic growth. Obviously, our other business starting from pasta because we can get new listing, we have -- so innovation, et cetera, special products and also the bakery in which we are gaining market share and we have room to implement the offer and also the listing to increase our share around the market in which we are present. And this, generally speaking, to try to share a picture of the situation.