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

[Audio Gap] every one, and thank you for joining today's call on the first half results 2021 of Newlat Food S.p.A. Joining me today, we have Angelo Mastrolia, our Chairman; Giuseppe Mastrolia, CEO and Chief Commercial Officer; Rocco Sergi, CFO; and Fabio Fazzari, Group Financial Director. I'm Benedetta Mastrolia, and I'm the Investor Relator at Newlat Food. So before starting this presentation, I would like to remind you that this presentation may contain certain forward-looking statements that reflect the company's management's current views with respect to future events and financial and operational performance of the company and its subsidiaries. These forward-looking statements are based on Newlat Food S.p.A.'s current expectations and projections about future events. Any reference to past performance of Newlat Food shall not be taken as a representation or indication that such performance will continue in the future. So we move on to Slide 3 of the presentation, which is the first half 2021 key financial highlights. Revenues for the period were EUR 245.5 million, down 3.9% versus the first half of 2020. If we look at the Pasta and Dairy and German segment, we had very good growth. So Pasta grew 5%, Dairy almost 11% and Germany grew almost 7%. So despite the difficult period, we definitely had some very good growth in some key markets and segments in our core business. EBITDA was EUR 21.7 million with an EBITDA margin of 8.8%. There was a slight decrease, which was natural due to the decrease in sales, as last year it was EUR 23.1 million of EBITDA and 9.1% of EBITDA margin. Free cash flow was EUR 17.4 million, and the EBITDA free cash flow conversion was 80.5%. So once again, this confirms the group's ability to generate free cash flow and to sort of improve our net financial position every time. Net income actually increased as opposed to last year. We are looking at the 2020 pro forma figures. So this includes Centrale del Latte d'Italia from the first of January of last year. So we had a very good growth of 4% despite the decrease in sales. And if we look at the net financial position, as a consequence of the good performance -- of the group performance, we actually had an improvement of the net financial position, which was positive by EUR 16.7 million versus EUR 5.2 million at the end of 2020. If we exclude the IFRS 16 lease liabilities, we would have EUR 32.3 million of positive net financial position as well cash. If we move on to Slide 4, where we see a very quick M&A update. So we have in our pipeline, at the moment we're looking at 3 deals, which concern 3 companies located, 1 in Italy, 1 in Germany and 1 in the U.K., so our 3 main markets. And just a very quick recap on the Symington's acquisition. So as you know, on the 4th of August 2021, we acquired Symington's, which is a U.K. based hot snacks producer. The integration process is going on smoothly. So we've been doing -- we've been having meetings, our strategic meetings and commercial meetings in order to align the 2 companies and work together towards a goal in terms of commercial, strategic views. On to the next slide, we have sort of an updated overview of the business as it stands today. So although we're looking at the first half 2020, which doesn't necessarily involve the Symington's acquisition itself, we wanted to give you sort of an update on what we -- where we stand today in terms of revenues and in terms of production and product categories. So revenues are in excess of EUR 600 million. EBITDA would be around EUR 60 million. We look at 65 -- sorry, EUR 59 million of EBITDA and net income around EUR 17 million. So we've sort of enlarged our product portfolio. So we've added the instant hot snacks and all the products that are being produced by Symington's, which are many. At the moment, our geographic presence is, of course, in Italy, which is 56.8% of our revenues, and the U.K. became our second largest market at 18.8% of our revenues. And it's followed by Germany, which still is one of the main markets for us of about 15.2% of revenues. And we still, of course, export to more than 60 countries. So we have an exposure to other countries. We've added 3 facilities, which are in the U.K., to our existing 15 facilities in Italy and a new facility in Germany. This slide, we like to look at this slide because it gives you sort of an update on what the -- what we've been doing. So we've had a continuous expansion of branded product portfolio. So we've added sort of this the last column here with Instant & Others, we call it Instant & Others at the moment, which shows you sort of the 3 key brands of Symington's, which are Naked, Chicken Tonight and Mug Shot. And as you can see, our business model is very similar to that of multinational corporations. So we've been really striving to achieve that type of multi-product, multi-brand, multichannel model that we've been -- that we've shared with you many times before. So we're really -- with this new acquisition we've had the chance to even further expand our product portfolio and to further diversify our product portfolio. So really good for us. So -- and we move on to Slide 7. Here, we have a quick update on the raw materials and the commercial sides. So raw materials, as many of you know, there's been a significant increase in the durum wheat's price in the last months. However, we've been able to renegotiate prices with retailers. At the moment, we've had a 50% acceptance of the new price. We're still working on the other 50%, we've been very successful so far. So it's been a very short period in which we've been able to renegotiate and it's been successful. So they're also showed in the successful renegotiations with B2B partners. And there's 2 key points for us. So the first one is that we have a fixed price contract in Germany, which sort of stabilizes our products below current prices until the end of the year. And we also have some fixed contracts in Italy until the end of November 2021. So for the next few months, we're still covered with sort of lower old prices. And just to give you an idea, the sector is initiating sort of a general cost pass-through. So all the producers are really trying to rebate their prices on retailers. Very quick commercial update as well. So we've had a good progression of the Buitoni-Delverde integration and sort of a phasing process in Germany. So the Buitoni-Delverde packaging has been launched, and it's -- as you've seen in the [indiscernible] before we have had actually very good results in Germany in the first half of 2021, and we expect to have good results even in the second half of the year. Regarding baby food contracts, the very infamous baby food contracts, we are expecting to start the commercial production on -- around autumn 2021. So I'm talking October, November 2021. And we expect to have around EUR 5 million of sales in 2023 and over 30% of EBITDA margin. So as we already mentioned, these products are very high-margin products, very specialized products, which gives us a very good margin. And very quick update again on the launches of the products that we saw in the last presentation plan in May and in March this year. So we've been able to launch all the products that we were trying to launch in the period. And some of them are already on shelf and some of them are soon to be launched. So in terms of new product development and new launches, we've been able to sort of achieve our goals. Last slide before we move on to the sales breakdown is the Germany situation in terms of Italian pasta. So here you can see sort of a slide which shows you the tons of pasta that are being sold. They were sold from -- starting from 2011, going till today. So in the last 10 years, there was a steady increase in tons, especially if we look at 2016 when Newlat started selling Italian pasta in the German market, there's been a constant increase in tons of -- of Italian pasta sold in Germany by us. And 2020 was a particularly good performing, well-performing year. And this year, we're seeing still some growth. So we're really happy to see that this market is performing so well in terms of pasta, and we've been able with our commercial team to really sell more of our pasta around the country. Now we move on to the first half 2021 sales, the breakdown analysis by sector and by channel. So move on to Slide 10. Slide 10, we have sort of a picture of the revenues that we had this year compared to last year and to 2019 because as you -- as we know, there was decrease since last year, which is the result of 2 main points. The first one is, of course, the exceptional results that we had in 2020, which were impacted by stockpiling, by panic buying and all those things that affected 2020. So therefore, that's -- for us, it's only a good comparison base because, of course, there was a movement that wasn't sort of expected in 2020. And there was also an increase in marketing and in-store promotional activity in 2020, which is in that incentivizing customers spending in this particular moment in time. If we look at the 2019 pro forma figures, we actually had an increase of 1.4% with an underlying CAGR of 0.7%. So still a good result. Also, if you look at EBITDA, there was actually an important increase. We went from EUR 14.2 million to EUR 21.7 million. So again, if we look at these numbers, we can see that although this year wasn't necessarily the best performing year, it's definitely been a good year compared to 2019. Now we move on to Slide 11, where we have the revenue breakdown by business unit. So as you can see, we have pasta, which increased by 5%. It was mainly driven by the increase in sales in the German market. Then we had milk, which decreased as the result of lower sales volumes and also a sort of a less favorable product mix versus 2020. Then we have bakery products, which also decreased 2.9% as a result of the decrease in sales volumes. Dairy products increased 10.9%, which was an extraordinary growth in this situation. If we think of 2020 as a very good performing here, this result was exceptional. So we had new contracts signed with new customers and also new private label contracts in this particular business unit. Special products were slightly down, 3% due to a slightly lower demand. But in terms of absolute numbers, it's not necessarily a huge decrease. And then if we look at other products as well, there was a decrease, which, again, absolute numbers, is not as bad as the 8% decrease that we see here. Moving on to Page 12 of the presentation. We can see the revenue breakdown by distribution channel. So large scale distribution was down 5.5% as a sort of a natural reflection of the lower traffic in supermarkets this year compared to last year. B2B partners also decreased 5.2% as a result of lower demand, lower consumer spending, and normal trade channel was basically flat. There wasn't much of a change since last year. But if we look at the Q1 2021 sales in which we had a decrease of over 17%, we can see that we've been able to catch up with last year's sales. So we've stated that and sort of good result overall. Private label was actually up 5.1%. This was due to new contracts with new retailers with [indiscernible] pasta and dairy. And then we look at food service decreased by 9.9%. Again, in absolute terms, it's not a huge decrease, but that's the result. Moving on to breakdown by geography. We look at the 3 main countries for us. So Germany performed really well, and it went over 20% of our sales being only in Germany. Italy decreased by 7.3%, as it mainly linked as the -- linked to the decrease in milk sales, which we saw earlier. Germany, as I said, went up 6.9% and other countries remained stable in the period. Moving on to Page 14, where we have the EBITDA margin -- EBITDA and EBITDA margin picture. We can see there was a slight but natural decrease in EBITDA and EBITDA margin. So we had 8.8% versus 9.1% of EBITDA margin last year. Pasta EBITDA margin went down to EUR 4.07 million versus EUR 4.25 million. Milk products were down compared to last year, and EBITDA was -- EBITDA margin was EUR 9.2 million (sic) 9.2%. Bakery products also decreased, and the EBITDA margin was 14.1 million -- 14.1%, sorry. Dairy products, the dairy products EBITDA increased as a result -- as a consequence of the increase in sales, and we were also able to slightly increase the EBITDA margin to 14.8% versus 14.7% last year. So not a huge increase, but definitely a good result. Special products also increased. The EBITDA and EBITDA margin of Special Products also increased, and the margin was 8 point -- 10.8%, sorry. Then the EBITDA relating to Other products is basically unchanged since last year. There was a slight decrease, which was naturally linked to the decrease in sales. Moving on to Page 15. We have the sort of the net profit and the income statement picture. So net profit was the figure that grew the most in the period. The only figure that grew in the income statement, which grew by 4%, and it reached EUR 7.1 million this year versus EUR 6.9 million last year in the pro forma and adjusted net income. And this is a great result if we think that we had a drop in revenue, which was almost 4% lower operating margin. And also, if we look at the interest payment of the bond that we issued in February this year. So it was a good result. We were also able to benefit from a tax loss carryforward, here as you can see in the income statement. And we had an overall profit margin of 2.9% versus 2.7% last year. Moving on to Page 16. We have the free cash flow and our financial position sort of picture. So as I already said, we have been able again to -- once again to show that we can generate cash from operations, and we had a very strong cash conversion. Free cash flow again was EUR 17.4 million, and the EBITDA free cash flow conversion was 80.5% at group level, so both Newlat and CLI. This allowed us to even further improve our net financial position, which was positive by EUR 16.7 million versus EUR 5.2 million at the end of 2020, and there was also a positive contribution on net working capital to the free cash flow number. Last slide, we move on to the net working capital and cash conversion cycle picture. So this year, in this last 6 months, we've been able to further improve our days of sales of spending. So we've been able to shorten the period to 37 days instead of 47 days, which is a great result, which also stems from our strong relationships with clients. So we've been named to really shorten the period of sales outstanding without compromising our days of payables outstanding, which remained basically the same. And in this period, we -- as a result, we've also been able to decrease our trade receivables, which were 54.4 versus 73.5 at the end of 2020. And net working capital as a consequence was improved in a way. So we went to negative EUR 58.9 million versus EUR 49.5 million at the end of 2020. And just -- that's the presentation. Now we can move on to the Q&A.

So as we usually do, I kindly ask you to unmute yourself and ask questions and wait for others to ask or otherwise, you can write them down in the chat, and we will read them up for you and answer your questions. Thank you.

It's Victoria Nice from Societe Generale. Can you hear me okay?

Yes.

Just wondered, is the removal of sales and profitability guidance related to uncertainties on input cost inflation versus price increases that can be achieved? And also related to that, can you give us an indication of the level of raw material inflation that you are experiencing? And are other inputs rising, we're hearing a lot about transport and packaging also rising? Do you expect an impact there? And when should we expect to see price increases realized? Or put another way, are there sort of contract structures that might delay the recovery of raw material inflation through pricing such as contracts that are negotiated annually, for example?

Yes, about the raw material, we can give you, I would say, a simple and precise message in the sense that -- we, and I think all the sector was particularly scared at the beginning of this strong increase. And after that, we start immediately to contact our clients to try to understand the possibility to apply this pass-through immediately. I have to say that considering the magnitude of the increase and the fact that this is something that impacted all the sector is not something specific by Newlat or a singular companies, all the sector is reacting, and we got already a lot of agreement for pricing increase. We have today a good situation in terms of raw material in Germany because as Benedetta anticipate, we have contracts that cover our needs until the end of the year. For the Italian production plant, we have raw material until mid -- end of November.

Sorry, Fabio. So you remember on the [indiscernible], we have the conduct for 3 years in Tuscany.

Yes.

This is -- it's a very important cover of the milk department. Sorry.

Yes. And I was just finishing about durum wheat. In this sense, I have to say that what we expect is to complete this price increase that was so far extremely successful and to have substantially at the end of the year, substantially a neutral impact in terms of negative impact from raw material inflation. So in the sense that we should be able to pursue all the impact. As Mr. Mastrolia was saying before, on the milk side, we are today well covered in the sense that we signed several contracts fixing the price for 3 years, and this means that we do not expect to have a particular impact on the milk side.

It's Dario Michi from BNP Paribas. The first question is on M&A. You have 3 deals according to your presentation, and a cash for about EUR 400 million as of the end of June. So could you please tell us the magnitude of these deals? I mean, are you going to employ all the cash you have? And if there is a particular deal which might exclude the others? And then the second question is on the statement in the press release referring to your budget forecast and industrial plan. You are ahead of these figures. Can you please share with us what do you expect for the full year? I mean, the margin is going to recover according to your statement about raw materials and so on. So a bit of granularity on this would be really helpful.

Yes. Thank you, Dario. About the M&A, we are in talk for deals that all together could cover about -- around EUR 200 million -- EUR 220 million. This is more or less the size. If will be less, we would be extremely happy. This means that we are going to pay a very interesting price. But apart this joking, we are concentrating on 3 targets that would continue the strategical process that Benedetta show in the slide that substantially include all our products and our brands in the sense that we want to continue the process to diversify geographically and also by product, our company and introducing new products that could create diversification, but also that could create potential synergies in terms of raw material, commercial asset, et cetera also with the other brands that we have inside our platform. This is the strategy that we are pursuing and I hope maybe to be able to announce something very soon. About the other question was about profitability. About profitability, to say, we made an important decision on the commercial side to avoid to participate to campaign that could have a materially negative impact on the price positioning of our products. And the dilution of the profitability that you have seen for the first half is mainly related to the fact that reducing volume, we have an operating leverage impact on our gross margin and EBITDA margin. Starting from this point, we believe that the potential negative impact coming from raw material will be totally offset by the pass-through. On the other side, we are experiencing starting from July, a recovery of the top line performance, organic performance. And this means that if we will continue on the trend that we are seeing, starting from July and until September, that the first week we had visibility of the first 2 weeks -- the first week of September. In this sense, I think that our profitability could be very close the level of past year, that was a very strong level of profitability. So I do not expect to have a dilution of profitability.

I have a question here about the type of targets you are proceeding on the M&A acquisition strategy, only to know a little bit about it. I will not ask about the industry because that could be too revealing. But I'm mostly interested to know if you are looking for companies that are profitable and companies that are in good shape? Or you are looking for companies that need a little sort of restructuring as you have done on the past and invested successfully. So I want to understand the type of deals you are proceeding.

Thank you, Gabriel. We are looking for both in the sense that we have a strong track record in terms of restructuring of underperforming assets. This is, for example, what happened in Germany, but also in Italy in [indiscernible]. We are looking for these kind of potential deals. We are looking for deals with potentially multinational company, which are being very interesting because we can get an asset with a very strong know-how. And sometimes as happened in the past, we can also think about a strong term -- a long-term strong relationship with this third party. This is something that in the past for Newlat group created a lot of value. And we are also looking at as it was the case of Symington of company that are already performing alone, but could generate a lot of additional synergies inside our group. This is especially the profile we are looking for. In terms of size, obviously, for us, it's very important to try to negotiate for target that could have revenues at least minimum EUR 50 million, but our ideal target is with the size of Symington, at least EUR 100 million of revenues and the possibility to accelerate our [indiscernible] versus the target of EUR 1 billion revenues. I think that as soon as we reach this target of EUR 1 billion and with the new sides of our group, also the M&A activity could benefit from the fact that we will be a bigger and more diversified player.

Also -- it's Gabriel again. So I was looking at the cash flow statement that you published in the presentation, and you were saying that the free cash flow is EUR 17 million this first half of the year, but it looks slightly higher for me. Could you explain a little bit on how you reach this EUR 17 million free cash flow level?

I think, Gabriel, that there are 2 reasons that could explain this high level of working capital. The first one is the fact that we continue to do a very strong efficiency action on the working capital side, that is giving us EUR 7 million, around EUR 7 million in the first half. The second point is related to the structure of the P&L of the group in the sense that we are not capitalizing nothing in the sense that all the expenses in new [indiscernible] referring to R&D, referring to other expenses that sometime to be capitalized in [indiscernible] are directly put in the P&L, in the cost base. And this means that the EBITDA that we generate in the P&L is really close to the free cash flow that you could generate because you don't have to make any kind of material adjustments. This, I think, are the 2 reasons in particular.

Again, Dario. Coming back to the M&A, might you consider also to buy minority stakes or just the majority?

No. So we don't consider [indiscernible] investment. Sorry, I leave a very quickly answer.

I apologize, but I'm not able to reach on the camera at the moment. I have a few questions. First of all, I would like some comments from you about the sourcing situation for [ seeing ] tons. And so what should we think about the inflation of raw materials and the impact on change of profitability looking to the next few months and next year? Second question is about the baby food, the special segment. You -- in the slide on page -- sorry, on Page 7, you mentioned that you expect sales for EUR 5 million in 2023. I'm just struggling to reconcile this indication with past presentation from you, I think in March, when we were anticipating, if I'm not wrong, you were anticipating the EUR [ 58 ] million revenue, about EUR 7 million EBITDA in full year '23. So I'm just trying to understand if this is a part of that ambition? Or what are you referring to? Sorry about that, maybe I'm a bit confused. And further question instead is on working capital. You had a further improvement here this time it was in terms of receivable time. I'm wondering whether the current situation in terms of raw material on the one side and the need to pass-through with grocery chains on the other side might lead an opportunistic approach to working capital in this respect going forward. So maybe accepting a bit less favorable cash in time or payment times in order to get better conditions with your suppliers and clients.

Thank you, Paola. So starting from Symington's. Symington's is a company that process as raw material part of our production in the sense that pasta for them is raw material. It's not wheat the raw material. This means that they could experience some months of delay versus what is our perception of the raw material increase. And in this case, they have been lucky because we start immediately also with Symington's to ask for a price increase to the U.K. customer. And they already realized a successful first round of this increase. They are continuing also for the bakery products. And we believe that also for Symington's considering what is feasible from this first approach, the results, the full results will be also in that case, absolutely positive. What is important to highlight again, also considering what you mentioned in terms of working capital potential impact from this general situation of raw material increase is that when the situation is a situation that is impacting all the sector, you saw in the past days that other and bigger player were speaking about the impact of the raw material, the fact that the market must change in the future to absorb this movement. This means that the situations that we are facing, fortunately, is not something that is impacting only Newlat or only the midsized players. It's something that is structural, is impacting all the sector. And this means that the pass-through to the consumer, to the retailer at first and to the consumer is a bit easier to be taken because it's an impact for all the sector, a structural situation. This means that I think there are no particular room for specific action from Newlat or specific commercial agreement. I think that the way is only one. So the modern trade, in particular, must accept this pass-through because it's something related to the market and is not related to maybe an increase of demand. The market is what it was. We have this year this news in terms of amazing increase of raw material, and I think that all the players, including the retailers must be adaptive to this new scenario. About the baby food, we share today what is the first substantially green light that we received from our partner for a product that will be sold starting from the last months of 2021 and 2022 and '23 only in 1 country, only in Mexico. This is the first green light we had during the first half of the year, and the activity is continuing now, a very, very deep activity to generate prototype, to test all the products, the capability of the products to maintain or the active principle and the quality facing a very longer [ trip ] versus in this case, Mexico, but also other region. And this is the first green light that we obtained from our partner. And we have visibility for this region what could be substantially the revenue base and the profitability. The numbers that you mentioned and that we show in March are the number for the full profit. But as of today, we obtained the green light only for 1 of this, and we communicate that we are working in terms of prototype and testing also for the other countries. And as soon as we receive other green light, we will communicate you these new green light, adding revenues and EBITDA to the level that we communicate today.

Okay. Maybe we are just missing the question about receivable and payables. Just to understand how much we expect to opportunistically leverage on your very healthy terms with this respect.

I think that -- no, I include this answer together with the first one. I think there are no room for specific action because it's not something a scenario in which we could try to find an opportunistic solution. And I think that nothing is going to change in this sense. And about the working capital, we [indiscernible] announcing the full year results that until we remain with this cash availability, we could try to use this maybe to obtain discount, paying maybe with lower [ BPO ], but it was not the case in the sense that we didn't find this kind of opportunity. This scenario is a particular one this year. I don't think that in the second half, we could find this kind of solution. And on this basis, I think that the working capital will continue to give us a positive impact also in the second half of the year.

Just a quick question on financials. The principal repayments of lease obligations have increased a little bit this year, especially last year, which type of leases are? It's for some facilities or some offices?

[indiscernible] a natural process of the renovation also expired contract. And you know that in this case, you have a increase of the NPV because the average life of the contract is substantially increasing. If we start with the base of 10 year. Maybe you have some contract that going close to the date of expiration, you renew this contract and you start again with a 10 years entity and the average value increase, but it's just a natural, I would say, a natural evolution of re-leasing. Maybe there are no additional questions.

Sorry, it's Paola Carboni again. May I have the question about the milk segment. I suppose because we had a bit of pressure here in the first part of the year. Do you expect to have an improvement going forward in the next few quarters?

About milk, yes, we expect to have a bit better performance in the second half. But obviously, in the specific situation we faced in the first half, you have to consider that especially the simple milk is something that usually retailor views in their basket to try to attract traffic with the best offer, et cetera, and the sector suffer for the new scenario after the COVID. We avoided to put our brands in this situation, try to maintain as much as possible our price positioning. And this is obviously, one of the reasons why we performed so bad. We expect that maybe in the second half a reaction in this sector, especially also considering the fact that in the first half, we didn't benefits from the contribution of the [indiscernible] sector that was substantially impacted by the COVID -- the lockdown related to the COVID. If we will gain contribution from the normalization of the [indiscernible] activity, I think that this could help to recover on the milk side.

I think there's 1 more question from [indiscernible], which says about the minus 7% in Italy, how far was the performance from the market?

Sorry, Benedetta, what was the question?

If you open the chat you can read it, too. So it says about the minus 7% in Italy, how far was the performance from the market?

The performance was -- depends product by product. On average, I would say that the performance was better than the market. We perform extremely better in some categories also by the brand substantially we have, I'm thinking about the bakery side, for example. But all in all, I think that the decrease that we reported in terms of revenues in Italy, in particular, was absolutely better than the market. And I can...

What I can add, Fabio, is that -- sorry, Mr. [ Lustig ]. So our minus 7% is not only driven by the -- we are totally in line with the market, that is a stable market. The minus 7% is driven by mainly the out-of-home and food service decrease that we had in the first period, so because of COVID transition. That's why we had a minus 7%. So it was part on -- due to lower consumption in the supermarket and in the retail. So a bounce back from the last year explosion. And then on the other side, a part comes even from the food service business. So it's not on market data essentially.

Yes. And anyway, the point is that considering this impact from the out-of-home, so the performance was absolutely in some case is also better because we have a lower exposure to the [indiscernible] and the other, better than the markets.

If there are no questions, we may end the call. In case you have any additional questions after the call, you can send us an email at [email protected], and we will be glad to answer all your questions. Thank you, and have a nice evening.

Thank you, everybody.

Thank you.

Thanks, everybody. Have a nice weekend.

Thank you. Bye-bye.

Thank you. Thank you.

Bye. Thank you. Bye.