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

Good afternoon, everyone. Thank you for joining today's call. My name is Benedetta Mastrolia, and I'm the Investor Relator in Newlat Food. Today, you are being presented in the 9 months results of 2022 of Newlat Food. Joining me today to discuss our results are Angelo Mastrolia, our Chairman; Giuseppe Mastrolia, CEO and Chief Commercial Officer; Rocco Sergi, CFO; and Fabio Fazzari, Group Financial Director. Before commenting our results, 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 event and any reference to past performance of Newlat Food should not be taken as a representation or indication of such performance will continue in the future. And this is not an offer or a solicitation to buy or offer to buy Newlat's securities. Now we move on to the presentation directed to Slide 7 of the presentation, where we have the key financial highlights of the first 9 months of 2022. As regards to revenues, we see that we had revenues of EUR 521.2 million in revenues, which is a marked increase of 15.2% versus the 9 months 2021 pro forma figures. Especially, as regards to Q3, we had a very good organic growth compared to Q3 2021 as we had an increase of 25.6%. As regards to business units, we had the major increases in Pasta, where we had an increase of 36.4% and in Dairy of plus 26%. As regards to our main markets, we had very good growth in all the major markets. So in Italy, we had an increase of 14.6% in sales. In the U.K., we had a marked increase of 21 -- 25.1%. And in Germany, we had an increase of 12% of sales. Moving on to EBITDA. We recorded an EBITDA of EUR 39.6 million, which compares to EUR 43.5 million in the first 9 months of 2021. In terms of EBITDA margin, we captured an EBITDA margin of around 7.6% versus the 9.6% recorded in the first 9 months of 2021. Although the margins have been impacted by raw material increases as well as packaging and energy and logistic prices increases, we were able to keep margins quite stable and also to recover some of the margin loss that we had in previous quarters in the last quarter of Q3. As regards EBIT. We had an EBIT of EUR 11.8 million which compares to EUR 17.9 million in the first 9 months of 2021. We had a very good growth of EBIT in Q3 2022, which is equal to EUR 4.02 million versus the EUR 2.75 million of that were recorded in the second quarter 2022. So we had a good recovery in the third quarter in all the major financial figures. As regards to net income, we recorded a net income of EUR 3.5 million, which compares to an adjusted net income of EUR 6.6 million in the first 9 months of 2021. We're looking at the adjusted figure because in 2021, we had a benefit from deferred tax liabilities, which was equal to EUR 5.3 million. So the reported net income was actually EUR 11.9 million. Therefore, we're looking at the adjusted basis to say, clean the number of any benefits that we had last year. As we have a look at free cash flow, we were able anyway, to generate quite a good amount of free cash flow of EUR 11 million. And we had an EBITDA free cash flow conversion of 80%, which confirms again the company's ability to generate cash flow even in, I would say, restrained conditions like these ones we're living in. As regards to net financial position. We had a very good recovery in net debt as well. So we went from of EUR 52.9 million at the end of the financial year 2021 to EUR 38.4 million at the end of the 9 months. If we exclude the effects of IFRS 16 lease liabilities, then that would have been EUR 7 million versus EUR 13.8 million at the end of 2021. Now moving on to the next slide, where we have sort of the update on the market positions that we have in -- we're experiencing -- we're seeing in [ this year ]. So as we already mentioned in previous so conversations, we started to introduce the Naked Noodle brand in Italy and in Germany. And in very recently, we received some exciting news about the Italian market, as we have been grant third Noodle brand in Italy by value, and this is a great achievement if we think that the brand has only been around for less than 6 months and it's only now being distributed sort of nationwide. And we have gained already 1.8% of volume share and 2.4% of value share. This is much higher than other pre-existing competitors like MARS and Nestlé. And in fact, MARS with Suzi Wan and Nestlé with Maggi are expectedly fourth and eighth in the Italian noodle market by value, whereas Naked Noodle is third by value. If we look also at the average price, we can see that the average price of Naked is much higher than the leader, which is Saikebon, where we have EUR 23.29 per kilo versus EUR 16.15 of the leader. And this is only where the distribution is only 28% of the total. So moving forward, we keep doing what we're doing, and we keep increasing our share as it looks like it's going to be the case. We can definitely increase this value even more and maybe surpass the other players that had of us at the moment. Now we move on to the next slide, where we have a very quick business update on some key topic. First one is strategic and commercial initiatives. As regards all the commercial initiatives that we've already described in previous presentations, we can confirm that they've all been successfully launched. So they're all going on smoothly. And we can see from the results that we are paying off -- starting to pay off now. In terms of commercial power, we also have been able to sort of demonstrate a high very strong commercial power despite the price increases that we have been applying. And this is also confirmed by the underlying volume growth as well as value growth. So we're able to actually have a volume growth as well as a value growth in this period. As regards Symington's, we confirm again the reorganization of the concept plant, which is still ongoing. We're still working on it. We're working on new product development, and we're doing continuous investments in efficiency like new pot lines, monetization at Symington's. And from the latest budgeting of 2023, we have seen that there is going to be a positive contribution on EBITDA from Symington's in 2023. Another key topic is the EM Foods acquisition, which was announced less than a month ago. So this new deal will increase our contribution in the bake in box and cake mixes in Europe. And we are also working on developing new lines in the flavor and fragrances business, which is a very exciting business and a very niche market as well. So very few -- with very few competitors. As regards raw material and inflation, we have been experiencing, of course, a strong inflationary wave, which is still present, and it remains quite difficult at the moment to make any predictions for the near future. However, we -- as mentioned in the previous presentations, we have some fixed contracts that will help us not be impacted as much in terms of energy increases in 2022. And on the basis of the current environment, we've already been working on renegotiating prices and additional price increases for the last quarter of 2022 and the first quarter of 2023. Now we move on to the breakdown analysis -- and analysis of the sales by different areas of the business. Moving on to the next slide, where we have the [indiscernible] general overview of the period. As mentioned earlier, we had an increase in sales of 15.2%. The period was characterized by an overall acceleration in sales growth, which was the result of a combination of factors, them being: number one, the volume growth of 3%, which confirms a strong and solid underlying demand of our products; new launches as well and new listings, which confirm also the strong commercial commitment of the company as well as the quality and the appreciation of -- the quality of our products by our consumers and customers. And also the strong price increases that we've been putting in place in the last months. This confirms Newlat's commitment to keep margins high and despite the very challenging environment. And as already mentioned, we have been working on new negotiations for price increases for the next month. Now we move on to the next slide, which is on revenue breakdown by business units. So in terms of business units, all the segments were positively impacted by a higher average selling prices versus 2021 as a result of higher costs. In particular, if we look at the business units, we can say that Pasta had a very strong increase of 36.4%, and this was a combination of higher sales volumes as well as a contribution from new customers. In terms of Milk, we had a higher demand in the service and normal trade sectors, and we also had a very good growth in the fresh and UHT milk as well as in the butter and cream categories. In terms of Bakery Products, we had a very good growth, again, and this was driven by higher sales in Crostino as well as demand in the private label B2B sectors. Other products also increased increase, and the growth was driven by a strong demand in the Mascarpone, especially in the U.S.A. with 20% increase, in Canada was 60% increase, Belgium with 16% -- plus 16%, in France with plus 32% and in Netherlands with plus 20% increase. We expect to see a good growth in the last quarter of 2022 as a result of the Christmas period. So to have a positive contribution from Dairy even by the end of the year. As regards the Instant Noodles segment, we saw an increase as well as in this segment, thanks to the innovation of products that has been going on in the U.K. as well as the export to new markets like Italy and Germany as well as other export countries. The Special Products segment also grew, thanks to the development of new countries within the existing contracts that we have in place in Baby Food, especially. And the Other Products segment also increased by 4.8%. Now we move on to the next slide, which is about the breakdown by distribution channel. Again, here, we had an overall increase in all the distribution channels. We had a growth in the large-scale channels, large-scale retail channel, which was -- thanks to the entry of new customers and also an increase in the average selling price. And in this particular channel, we had a good growth of Pasta and Dairy. As regards B2B, normal trade and food service. These channels went, of course, as a result of higher average selling prices, but also thanks to an increase in demand. We had a very good growth in these channels in the Pasta and Special Products segments. And as regards the private label channel, we had an increase compared to 2021, and this was mainly due to an increase in the Pasta private label business. Moving on to the breakdown by geography. Even here, we had an overall increase in all the main geographies. All the markets were impacted by higher average selling prices. And in Italy, for example, the sales went up as a result of higher sales volumes in Pasta and Instant Nodes and in the Bakery sector. And as mentioned earlier, the introduction of Naked noodles and Naked rice was very well-received by Italian retailers and customers. And this has been great, say, contribution into the overall increase in sales. In terms of Germany, the revenues also increased following higher sales volumes, especially in Pasta and Dairy. And also thanks to the introduction of the Symington's instant noodle range, which has been performing very well there as well. In terms of United Kingdom sales, we have a growth of 25.2%, and the increase is linked to higher volumes in Pasta and the Instant Noodle sector, following some initiatives and some new launches in the market. And as regards to other countries, we had an increase of 4.95% in the period. This is also linked to other products such as Dairy Products and Pasta. And now we move on to the EBITDA breakdown by business unit. So EBITDA was EUR 39.6 million in the first 9 months of 2022, which compares to EUR 43.5 million in the first 9 months of 2021. If we look at only at Q3, we actually had an EBITDA of EUR 14.2 million, which is one of the, I would say, the peak of the year with an increase of plus 19.2% versus the second quarter of the year and an increase of 11% versus the second quarter -- or the first quarter, apologies, of 2022. So despite the very challenging scenario, we've been able to keep and mitigate the dilution of profitability as much as possible. And this -- of course, there was a mismatch between cost increase and cost pass-through. So of course, there's still has been a dilution, but we kept it as minimal as possible. However, we are still very confident that the company will recover its profitability in a short period of time, once the current environment kind of settles to sort of the normal and stable situation. And this will be possible, thanks to our portfolio diversification, industrial efficiency, high on brand positioning as well as a strong financial flexibility. Now we move on to the free cash flow and sort of overview of the quarter's slide. So free cash flow generation remained quite solid at EUR 11 million despite the investments that we had now in net working capital, which was, I would say, necessary in such a difficult market environment. We expect to still have a cash generation in Q4, which will drive to further reduction in net debt. As regards the evolution of financials in the quarters, we can see that we had very strong organic growth both in volumes and in value in Q3, where we had an increase of 25.6% during the third quarter. As regards EBITDA, we had a very strong recovery in Q3, where we had an increase of 19% versus Q2 and an increase of 11% versus Q1. And EBITDA margin was still higher than Q2. So we had a 7.8% EBITDA margin in Q3 versus a 7.1% EBITDA margin in Q2. As regards to net profit, we were actually able to recover sort of the loss that we had in the second quarter. So we were able to record a net profit of EUR 1.35 million in Q3 alone versus the -- you can see here in the bottom of the table, robustly situation before. So we were able to basically keep a very good result despite the inflationary scenario of this period, and we were actually able to perform better than the last quarter. Now we move on to the last slide, which is the 2023 expectations. One, so as mentioned, we are experiencing a very complicated scenario due to the impact of energy costs as well as the geopolitical uncertainty that is still persistent. And despite this, the company confirms its commitment in further price increase campaign, which will work on the pass-through of energy costs. Also, we are committed in improving industrial efficiency and product innovation plans. And we mark our commitment to a strategic focus on the M&A, and we have some interesting opportunities already in advanced stages, and we hope we can share with you very soon. Now we are ready for the Q&A.

[Operator Instructions]

It's Victoria from Soc Gen. I just wondered, sorry if I missed it. Did you confirm the contribution from pricing in the third quarter? And then my second question was just if you could remind us, please, on energy costs as a percentage of sales.

Yes. During the 9 months, the contribution of pricing and volume remained substantially stable, a split between 30%. And of the growth rate reported 30% is volume and 70% was driven by value by pricing. In terms of the weight of the energy cost on our P&L, the weight is 3% of revenues. But obviously, now we are starting experiencing the new level of the energy price that we will experience, in particular, in 2023, but we already start in this month. And obviously, we expect this ratio to increase accordingly with the tough situations that we have on the market. But the starting point is 3% of revenue.

And can I just check quickly -- is it that you'll get spot prices coming in from now? Or are they hedged prices that are at a higher price? How does that work?

No, we are not linked to the spot price. There is a negotiation in place because we had, in the past, a fixed contract for the energy. Now we are renegotiating this contract with the counterpart in Italy and Germany, the U.K. remains still stick to a fixed rate until September 2023. Obviously, it wouldn't be the spot price, but it will be unfortunately higher than the level we are paying today.

And is it an annual contract Italy and Germany?

Yes. In this situation, we want to remain stick to not very long duration of the contract because we believe that the situation is absolutely so exceptional. And we order that we are going to see a normalization going forward.

Okay. And then just sorry, quickly on the pricing and volume contribution. You said for the 9-month stage, it's 30% volume. Is that the same for the third quarter as well, specifically?

Yes, 30. For the third quarter, the contribution, yes, is more or less the same, probably a bit higher in the third quarter because you see that in the third quarter, we have a very strong increase in revenues versus the other quarter, plus it's about 25%. But anyway, yes, the situation is more or less stable in terms of the split price volume.

Can you hear me?

Yes, Paola.

I have a few questions. First of all, looking to the current quarter. I would appreciate if you can comment about the price actions you are negotiating. When should we expect some relief from that and to what extent? So if you can give us some color on your expectations for Q4 given that we are, at least, half way at this point? And second question instead is on the margin trend of the third quarter. In particular, if you can elaborate a bit on the performance of Symington's, which I mean probably I don't know if I have the correct numbers for the third quarter reference last year. But it seems that, say, most of the margin rate was experienced at Symington's compared to Q3 '21. And on your divisions, excluding CLI, so excluding Milk and Dairy, so if you can elaborate a little bit by division, mainly on Pasta Bakery and Symington's.

I think that I can answer over together the question in the sense that I think that it's a bit misleading to be so focused only on pricing and the price section. In the sense that the goal of the company for all the 9 months, and it is the goal for the year, is not only to pass through the increase of the raw material and other costs, but also to maintain a healthy volume trend. This is very important because this means that at the end of this difficult environment we will maintain or will have a better underlying situation for our business. And this is important because we also managed during the year, all the action on the pricing, together with a direct strategy on volume not to lose market share, not to lose volume into the business. And as of today, we reached a very strong result. The situation is improving because if I consider October, for example, we are getting several, I would say, exceptional but very strong results in different business division. I can give you an example that we discussed before this call internally. The example is Pasta that is getting an exceptional but very positive performance in October. We reached only in Italy, an EBIT that is close to EUR 1 million for 1 month. This is absolutely amazing. We hope, obviously, to maintain this performance for the next month, but this is clearly an exceptional performance. But it's important to highlight you how strong is how effective is our strategy. in this sense. And the fact that as soon as we are going to see a stabilization of the inflationary trend into the we need just a very short period of time to regain the margin that we lost in this particular difficult scenario. This means that entering in the comment, division by division, it's difficult to define a trend because all the divisions are facing different raw material trends, different volume trends. There are different commercial strategy behind because the commercial strategy are planned market-by-market. This means that the trend could be different behind so among the different division. But the strategy is the same and is to try to get at the end of the year, a level of EBITDA in absolute term that could be as close as possible to the level of last year because our goal is to try to reduce as much as possible the dilution, not in terms of margin, but in terms of return on capital. And the combination of the strategy that we are put in place and the reduction of the net financial positions altogether could give an important contributions to get the goal we have in mind. So to reduce the dilution of the return on capital employed.

Okay. And just a comment, if I may, you think about raw material, which are having different trends by segment. So if you can give us some comment on what are you seeing? Have you been seeing most recently on your main raw materials for milk and wet and how do we expect this to play in the next few months, in particular, if you remember us of -- how are you positioned in terms of stocks for what, in this respect?

I can tell you that, generally speaking, the situation remained tough because we are experiencing a bit of stabilization, but stabilization at a very high level. This means that the situation remain tough, especially in the milk market. We expect going forward to have some changes in this trend because they are unsustainable for the market, and we expect to see, going forward, a reduction from current level. But at the moment, the situation remained tough. We are buying a very interesting and good level, durum wheat, for example, now at levels that are a bit below the spot market. And -- so we believe we are doing a great job on this, but the situation remain generally speaking, not stabilized with a lot of volatility. And this is the reason why we gave into the press release, a cautious comment even if we are experiencing a very interesting result, evidences, in October and in the current months. But we want to remain cautious because what we are experiencing today, even if there is stabilization, sometimes, we are buying at a lower price. It is a starting point of cost reduction. We don't have the visibility to say that this is the new trend or this is just a rest, and we will see a new acceleration in the coming months. There are a lot of variables that are not clear, starting from the war in Ukraine. And so generally speaking, the inflationary wage is still present, and we don't have a clear view of what will happen in the future. This is also the reason why our contract, generally speaking, remain with a short duration because we believe that going forward, the situation must stabilize and maybe the price could be better for everything, raw materials, energy, et cetera.

I think Mr. [ Castaña ] want to say something.

Congratulations on the results, especially details of a very challenging scenario. My question is rather on the strategic end of things. You compete into the Milk and Pasta segments. You've grown quite steadily having a considerable market share in that segment, especially in Italy. And seeing forward, do you see more likely that you will consolidate a bigger market share on that end? Or you might try to look into a more vertically integrated strategy, meaning that you would use the Milk as raw material for cakes and other sweets like you did with Pasta and the Symington's acquisition. Because you've mentioned the return on capital employed and Milk and Pasta has probably low margins. So will it be easy for you to compete with the big ones on the volumes? Or you will go on the -- more on the specialty side?

Maybe -- Fabio, again, I can give a bit of light concerning the debt. So concerning, yes, the strategy in Yes, you are right. We are in the commodity business. But as you may know, we are owner of all brands. So we are a branded company, and we are owner of premium brands in our portfolio. So what is happening in the supermarket chain is that the premiumization of our brand is, let's say, taking out from the offer of supermarkets. All the middle, let's call it this, all the middle companies, so in between. And thanks to the fact that we have brands, the leader like in Milk segment, you mentioned like Mukki, like TappoRosso, like Tigullio and so on. Now we are the premium. Then there is 1 national player and there is a private label segment. So -- and the same on pasta. So we are in Germany, to give you an example, we are a leader with our Delverde Pasta. But the place on the shelf is just for us and other 2 competitors. And what we are gaining now it's -- we are gaining more market share even on the private label segment to increase our sales and to gain market share, without affecting our products. And I can tell you that on the other side, of course, we are thinking about already thinking about even a verticalization of all the users of all our raw materials, as I mentioned before. So we are working on both ways concerning -- so we are in -- one way, we are in a situation in which our bank is -- they are not affecting our -- even if we are commodities, our premiumization is giving us a really good position on the shelf and now what is concerning the price power that our products have. And then on the other side, we are verticalizing all our commodity production to produce noodles, pasta producing noodles. We already launching Minuto in Germany with our own paste produce [indiscernible]. We are -- we will produce in the next period, of course, product based on milk and the milk will come from Italy as well because I remind you that we are the only owner in Italy of a powder plant -- power plant that can produce by itself, powder. We produce powder for babies, but potentially, we can produce powder of milk as well. It's just to give you more an idea, general. Here's Fabio.

Thank you, Giuseppe. Maybe I can add just maybe 2 things. One is strictly into what Giuseppe had mentioned and the fact that our competitive advantage is to compete in our market that could be defined as a commodity market, is not only the market position of our brands, but also the industrial know-how that we have. First of all, it's important to highlight that the results that we are achieving in the Milk and Dairy segment are also linked to the fact the combination of Centrale del Latte d'Italia and the Newlat Milk and Dairy business is getting synergies and giving us more efficiency than in the past. And this, obviously, had plus a lot in facing this particular scenario. The second point linked to Pasta is that Newlat could count on an industrial know-how that is unique. So we have the possibility to produce all the kind of pasta that are today into the market in terms of format, in terms process, in terms of special products, gluten-free, [indiscernible] et cetera. And this puts us in a strong position in the sense that if you don't have this technology and you need the product, the investment is not easy because all these assets are really costly. And this means that when we get a new contract in B2B, for example, the contract is really interesting because we are negotiating with the counterpart that need this production and there is lack of offer for this kind of product. This is the advantage together with what Giuseppe mentioned before that allow us to compete well in a market that could be seen as a commodity one. But there are a lot of angles by which you can see that in the reality, you need. So a very strong [indiscernible] and a lot of work behind this result even if it seems -- it could seem a simple market. Another thing, the second point is relating to the M&A in the sense that our strategy is not to only to try to maximize the spare capacity that we have to grow through a new B2B contract, new listing for our brand. But also to participate to consolidation process that we see in the food market everywhere because in this industry, in particular, in Milk and Dairy. But I think, honestly, in all the categories. The size is very important. There are still a lot of players with mid small size in Europe. And our strategy is to try consolidate further this industry and to create this big platform, very well-diversified in terms of products, brand, industrial know-how, country, et cetera. And this is another important part of the strategy that could allow us to increase value for our shareholders.

It's very clear. A follow-up, but it's very short is on the M&A side. Have you seen in the latest months, an increase in offerings, especially in the lower and lesser capitalized companies due to these constraints? So in terms of opportunities, do you think they are increasing? I know you're focused on -- you have your deals already in advanced stages, but do you see deal flow coming with more offers?

Yes. You have to say that today, we have 3 potential deals on our tables. One is in advance but the other are anyway, interesting deals, not necessarily linked to mid-small sized company. But what we are experiencing today is that looking at 2023, there are opportunities already into the market. Single companies but also brands or entire divisions that multinational corporations want to divest for a strategic reason, I don't know. But yes, we are experiencing -- an increasing scenario in terms of opportunities. And what is also important for our strategy is that the situation, in terms of interest rates and the market of funding is also creating a good situation in the sense that maybe until 6 months ago, they were in the market, a lot of financial players, mainly private equity that wanted to buy everything not because is a good opportunity, but because they had to buy. Today, I think that these situations could make all the players more selective in terms of which kind of deal I want to close. I want to really close. And probably for what we are experiencing, there are also interesting deals that maybe could make not a lot of sense for financial players, but are more linked to industrial players like Newlat is, and this could, obviously, reduce probably for some deals, the competition into the market. So we are very happy about the general situations that is coming out from the current scenario in the M&A market.

Yes, a positive side on the crisis.

Yes.

Related to that, I wonder if I could ask with the bond raise. If you conducted any interest rate swaps. And is there any sort of floating rate exposure that we should be thinking of?

No. In terms of the average cost of debt, I do not expect to have a material impact from the current situation in terms of interest rate. I think that on average, we are financed at a very stronger level of rates. We remain on average below or around 2%. And I think that considering current bank spread, it's a very strong result. And I do not expect to have a particular impact. I can say that probably, we could expect to have a lower impact on our P&L because considering the situation in terms of short-term rates today, also 2 months, 3 months or overnight deposit is giving you positive rate. And probably, we could have in the coming months, a better management of our cash available. This means that we could expect also to have maybe a better situation in terms of P&L impact in this sense.

With this, there are no more questions, we may end the call unless anyone else has any final questions. So thank you so much for joining today's call. And we are at your disposal for any further follow-up questions. You have our e-mails. We're available to answer all your questions. So thank you so much, and have a nice evening. Have a nice weekend. Thank you.

Thank you.

Thank you. Goodbye.