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

I'm Benedetta Mastrolia, I'm the Investor Relator in Newlat Food and thank you for joining Newlat Food's 9 Months 2023 Earnings Call. 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 on our results, I would like to remind you that this presentation may contain specific statements that are neither reported financial results nor other historical information. Any forward-looking statements are based on Newlat's current expectations and assumptions of future events and are subject to various risks and uncertainties that could cause these results to differ materially from those projected or implied by these statements. Now we move directly to Page 7 of the presentation, where we have our financial highlights for the period. So as for the last presentations, we are presenting our results on a consolidated basis, which means that the EM Foods revenues were included into the consolidation scope only from the 1st of January 2023, and the 2022 numbers do not reflect the EM Foods acquisition. As regards to revenues, we had a revenue of EUR 600.7 million, which is an increase of 15.2% versus last year's results. We had an overall organic revenue growth of 11.2%, and we had the highest increase in instant food by 30.9%, which is, of course, boosted by the EM Foods acquisition. And dairy by 24.7% and bakery by 14.5%. As regards to our main markets, we had the highest increase in Germany once again by 20% in the first 9 months. In Italy, we had an increase of 9.8%, and in the U.K., we also had a good increase of 11.7%. Moving on to EBITDA. We're looking again at the adjusted EBITDA as usual. We had an increase of 36.6%, which means that we had an EBITDA of EUR 58.3 million as opposed to EUR 42.7 million in the first 9 months of 2022. If we look at the adjusted EBITDA margin, we had a very good improvement, and we went from 8.2% to 9.7% in the first 9 months. If we just look at Q3, we actually had a very good result, and we had a very good recovery of margin as opposed to last year. We actually went double digit in the last quarter. We had an EBITDA margin of 10.6%. Moving down to EBIT. We had an EBIT of EUR 31.8 million as opposed to EUR 11.7 million last year, which marks an increase of 171%. So we had a steady improvement of all the income statement figures, which kind of outpaced the increase in revenues. And we have achieved this, thanks to, of course, the, I would say, a very important attention to costs and especially, we had basically no increase in admin and sales costs. We had just a slight increase in those. So very good management of these lines as well. Moving down to net income, which is the one actually performed the best in the period, we had an increase of 414% versus last year, which means that we went from EUR 3.5 million at the end of the first 9 months of 2022 to EUR 18.2 million at the end of September 2023. We had a very strong operating leverage, which helped us overcome the higher net financial cost that we incurred in this period. And we were able to basically have a very, very good result even as -- even looking at the other figures in the income statement. Moving on to free cash flow. We had a free cash flow of EUR 29.2 million, which is an increase of 166% versus last year. We had a very good performance of free cash flow, especially if we compare it to last year's results. And thanks to this free cash flow generation, we were also able to further improve our net financial position. If we're looking at net debt, indeed, we had an improvement of the net debt excluding IFRS-16 liabilities, which went from EUR 63.1 million at the end of 2022 to EUR 14.8 million at the end of September 2023. So we have -- whether this improvement, and even if we look at the figure with the IFRS-16 liabilities included, we had a very good performance. And we had a net debt of EUR 60.5 million as opposed to EUR 109.8 million at the end of 2022. Moving on to the next slide. We've wrapped up some of the 9 months results of some of the best and well-known food companies in the world and in Europe. And we were able -- even in this context to be up there with the market leaders. And to be, in this case, we were the second best performing company among the sample of companies we've picked. And this shows that even if we're a smaller company compared to these huge companies, we actually have a very good operating leverage, we have a very good strategic positioning as well of both our brands and our position in the market as an operator in general. Nestle [ as senior ] -- we've outperformed sort of big companies such as Nestle, Unilever, Kraft Heinz, Ebro so we're really, really proud of the results and you can see a little bit more of the results here. On to the next slide. We have just a little sneak peak what we've done in Germany in terms of the Minuto range. So we've just launched in the beginning of October end of September, the Minuto bakery range in Germany and some of the most famous retailers in Germany, such as Edeka. This is just a very quick figure of what we've just launched. We will be launching more products in the near future. And Minuto stands out as one of the most youthful and most modern proposals on the market compared to the existing players in this industry and really hopeful that this product will keep growing in the future. We've had a really good reception, both from consumers and customers so far and are really happy with the product and we cannot wait to actually expand the range, which is already ready to launch in the next few months into the German market, and the German retailers, and we will be selling these even in our other reference markets. Moving on to our breakdown analysis of the sales. We move on to our revenue highlights again where we have some of the highlights of our income statement. So as just mentioned earlier, we had an improvement of revenues of 15.25%, which means that we had EUR 600.7 million of [ viewers ] in revenues and we had an overall expansion of our market presence as well as our client base. If we look at the other figures of the income statement, we had an increase in gross margin, for example, 23.78%. So the more we go down in the income statement, where we can see that we've outpaced the revenue increase. So we were able to -- had sort of an enhanced operational efficiency. If we look at cost of goods sold for example, we can see that cost of goods sold accounted for 81.9% of sales as opposed to 83.2% last year. So we had an improvement in the purchasing conditions as well, which reflected into these numbers. EBIT also shows an impressive increase of 170%. And this, again, really is proof of our operational performance and profitability. And as just mentioned earlier, we had virtually no increase in sales and distribution and admin expenses, which only increased by 2.91% and 1.28%, respectively. And this really shows our meticulous control of all the costs that go into the company. Then just to mention again, the net profit surged by 413%. So we had EUR 18.2 million in net income. And again, this is really thanks to the really good leveraging of our inputs and output costs. Now we move on to the breakdown by business units. As can be seen by the bar chart, we actually had an improvement in all our business units. The one that stands out the most is the organic growth is dairy products, which increased by 24.7% and we had a really good growth in this particular segment. We actually had -- we just -- we worked to increase our client base as well as relaunching our products. We actually just relaunched our main brand, which is Optimus in Italy with a new packaging. So we're really eager to see what this is going to be like in the near future, but we've actually seen really good reception as well so far. In terms of Pasta, Milk, and Bakery, we also had a very healthy growth in all these segments, which increased by 11.4%, 10.4%, 14.5%, respectively. In terms of Pasta and Bakery, most of the growth was attributed to different channels. So one of them being large retailers, especially in Germany for Pasta. And in B2B contracts as well in Italy and in other countries. We actually signed a few B2B contracts at the beginning of the year, which helped us improve our Pasta and Bakery sales. As regards Milk, since it's a more local type of product, we're actually seeing an increase in milk mainly in Italy, of course, and in the of traditional channels such as large retailers as well as normal trade and food service. in particular. As regards to Instant Noodles and Bakery, as mentioned earlier, this data is influenced by the acquisition of EM Foods. However, we will start increase in the instant noodles segment, in particular, thanks to the addition of new products into both the Italian and the German market as well as in the U.K. market. So recently, we just launched a new packaging and new recipes for Naked in the United Kingdom, which is very well received by customers and clients like. And we've seen very good reception as well of the other products that we already mentioned in previous conversations, so Naked ultimate in Italy and in Germany. And we keep seeing really good feedback from clients in Italy and Germany as well. And we hopefully will see more contribution as well. Organic contribution coming from the bakery mix since the launch of Minuto into the German market as well as the launch that will be in the near future in other countries as well. Dairy products I just mentioned. And the special products had a growth of 4.7%, which is mainly coming from B2B contracts that we have in this segment. Moving on to distribution channel. So they all grew quite well. In particular, if we look at large retailers and food service, these are the ones that grew the most by 21% and 18.9%, respectively. We had an overall growth of all -- mostly all of our business units in the large retailers. So we had a number of higher demand in pasta, instant noodles, milk and dairy segments as well. And we had, as mentioned earlier, an increase in food service related mostly to milk as it's a very specific channel for milk and dairy products. As regards to B2B sales, as mentioned earlier, we had an improvement of 11.6%, which is actually coming from the contracts I mentioned earlier about Pasta and Bakery in particular as well as other countries such as special products as well. As regards Milk and Dairy, we had the most growth in the -- [ almost 3 ] channels, so the growth that can seen there is mostly related to Milk and Dairy. Moving on to geographies. Again, Germany grew the most by 20% in this period. So it is keeps proving itself as our best reference market at the moment. In terms of sales, we've seen an increase in both Pasta and Instant Noodles as well as the contribution bakery mixes a little bit, but we will see more of it in the last quarter with the momentum that will take the Minuto dessert line in to Edeka and others retailers in Germany. As regards the U.K., we had an increase of 11.7%, which is boosted by an overall increase in demand and also in prices, but also by the new launches of the Naked best ever range and suppose other recipes that were put out into the market as well as other initiatives regarding, for example, Mugshot, which has been relaunched and revamped well recently. So we've seen a really good performance in the U.K. as well. Italy also went pretty well. We had an increase in mostly with Pasta and Bakery B2B but also Noodles and Instant products in Italy as well as Milk, of course, which actually mostly related to the Italian sales. So of course, we had an increase in there as well. As regards to other countries, of course, we had an increase mostly due to the acquisition of EM Foods in France. However, we saw an increase in most -- in other countries as well and the countries we export to. We've seen an increase in different export products such as dairy products as well as pasta as well as bakery where we've seen an increase in all of these products. Moving on to the next slide. We have an EBITDA breakdown by business unit. So as can be seen from the right-hand side, we have actually an improvement in basically almost all the EBITDA and EBITDA margin figures. As regards EBITDA margin in pasta, it's actually the one that improved the most. We went from just 4.6% EBITDA margin to 10.9% at the end of September 2023. So we actually had a more than double increase in EBITDA margin, which is boosted by better conditions of purchasing as well as a better positioning of our products into the market and some very advantageous contracts that we signed. As regards to bakery products, we also saw a really significant increase in EBITDA by 58.3%. And we also had, once again, Bakery being our best performing segment in terms of EBITDA margin, where we had almost 14% of EBITDA margin as opposed to 10% last year. So this is, again, thanks to better purchasing conditions, better pricing points into your clients and just an overall improvement in all the different things that could -- together EBITDA. Overall, we had an increase basically in all 3 business unit's EBITDA margins, but not in the instant noodles and bakery segment. This is because of the EM Foods acquisition which has an overall lower EBITDA margin as opposed to the preexisting it's noodles and sort of [ same entrants ] segments. So we had to go from 11.6% to 7.2%. However, we expect that this will pick up as we keep putting out new products and actually work on efficiency with EM Foods as well. In general, as I already mentioned earlier, we had an overall improvement in margins in the last quarter, and we had an overall average EBITDA margin in Q3 of 10.6%. And Here, it can be seen a little bit more into detail. So we can see the cash flow statement first. which, as mentioned, is -- the free cash flow generated for the first 9 months of 2023 was EUR 29.2 million. And in both the bar chart and line chart as well as the table below, you can see a bit of the evolution of both EBITDA, EBITDA margin and then free cash flow as well as the revenue growth throughout the last quarter. So as can be seen from the line charts, we actually see a very steep line going upwards. So we've gone from just 7.13% in EBITDA margin to 10.57% EBITDA margin from Q2 2020 to Q3 2023. So we've actually seen a stat improvement in these numbers. We've seen an improvement in EBITDA as well. If we look at last year's EBITDA, for example, for Q3, we see EUR 14.2 million as opposed to EUR 19.8 million in Q3 2023. If we look at revenues as well, we had a steady improvement. Q3 is usually a weaker quarter as opposed to, for example, Q3 of Q4, where we expect this year to be in line with last year, but above following sort of the same growth rate we've seen in this quarter. So we expect to see an improvement in Q4 as opposed to Q3 as well as Q4 last year. So we're really hopeful that we will close the year with really good numbers. And underlying free cash flow, as some of you may remember, last year, we had to sacrifice some free cash flow because of the extraordinary inflationary events we had to incur. But however, it can be seen in the very bottom line of the black chart of the table, we can see that we had an improvement going from minus [ EUR 3 ] in Q2 of -- free cash flow going up to EUR 11.8 million in Q3 2023. So that we had a steady improvement kind of stabilization of free cash flow in the last few quarters. Moving on to our next page, which is M&A opportunities. We're sort of reiterating what we already said in the previous presentation. So we are still in a very favorable environment, which is -- thanks to different factors, one of them [ rise in ] interest rates been really favorable and the current credit market also being favorable for our type of structures and leverages and as well as the fact that food companies are not as appealing at the moment for financial investors. So we have more space to work with food companies to acquire some really interesting targets. We are still into the process we announced earlier this year about a potential acquisition in the U.K., which is well over EUR 1 billion in revenues. And we're still talking with the company, and hopefully, we can give some news in 2024. We, however, are still keeping an eye out other acquisitions. So we actually have conversations going on with different counterparts. And we have -- we are looking at different food targets with revenues being within EUR 50 million -- EUR 200 million in revenues. And as regards to the target we announced last year coming from a multinational corporation with operations in Europe. We're still waiting for the internal reorganization process to move and to give us a green light to go on with the process. So we're still holding this one, but we're still working on many different opportunities that we hopefully can share with the market soon. Moving on to the very last slide where we have an outlook on 2023 results. So we, as a management expect to have results that are in line with the ones presented today. So we expect to have a consolidated revenues grew of with a double-digit growth. We expect EBITDA margin to be above 9%. And we also expect having free cash flow to surpass EUR 35 million and with a free cash flow yield of over 13%. And as just said, we are really, really committed to our strategic focus on M&A. We're really committed to closing at least an acquisition. And at least one of the ones we've just mentioned. Of course, we are still open to see other targets in case they come forward. So we are really working on that, and we really hope that we can share some really good news soon. Now we can move on to the Q&A, so we can open the call for questions. As usual, you can either mute yourself and ask the question directly here or you can send the questions via the chat, and we will read them out for you and answer your questions. Thank you.

Arianna Terazzi from Intesa Sanpaolo. I have 2 questions for now. So just to better understand, which is the updated CapEx level for '23, 2025 and basically for '23, which kind of level is embedded into your cash flow projections? And then second, if you could remind us which is your target in terms of instant noodles and bakery mixes in terms of profitability and when it could be reached?

Good morning. So about the first question, the level of CapEx, we believe that for 2023, we may have a CapEx spending around 2% of revenues. And we expect this to be a bit below 2% coming from, so far 2024, sorry, and a bit below coming from 2025. As you saw, it's not linear during the year, this depend obviously about the timing of the different projects. We don't have proportional spending quarter-by-quarter. And about the instant noodle profitability, we have several projects ongoing. For sure, our target is to reach around 10% of profitability for this division. We have several projects ongoing. Part of the project are related to automation and efficiency in the plant in Symington. Other projects are related to -- on the conversion side are related to the development of new innovations, new products, the production of the European part of the business in France in the EM Foods, where we already transfer [ our line ], and we will start very soon. So there are a lot of projects ongoing. After the acquisition, we announced relevant amount of synergies. It's clear that what we faced after the acquisition with this material increase of the inflation, the cost of single project in terms of raw material because if you have to introduce automation in a plant, you may understand that maybe -- so we need also to wait for the right time to buy a new machinery, robot or something that was materially impacted by the inflation wave, and for this reason, we are a bit [indiscernible] versus the original plan, but the target remain in place, and we are confident that, in a couple of years, we can complete the full achievement of the synergies from the U.K. acquisition.

We have a question coming from [indiscernible] in the chat, so I can read it out for everyone. So one question from my side is, since the growth rate is getting reduced a little -- maybe Paola is?

Can you hear me now?

Yes.

Maybe just 1 second, Paola, we complete to -- answer to the question that we received in the chart, and then we come back to you.

Okay. So since the growth rate is getting reduced a little bit in comparison with the previous quarters, how do you see the market stages for keeping with the organic growth? And could it impact the EBITDA margins in the future due to potential price reductions in case there is a price reduction request from the market?

Yes. On this point, we can answer that. First of all, at the moment in the market, we don't see any sign of weakness everything is going on very well. The demand remained robust. So the market is answering very well to all the initiatives that we have in place. The fact that you are seeing a reduction of growth is mainly related to a mathematical factor. The point is that most of the price increase has been made in the second half of last year. This means that we benefit from comparison base -- positive comparison base in the first half of the year. In the second half of the year, we have more challenging comparison base. This means that the growth rate is naturally reducing, but this is not driven by reduction of price or other initiatives. It's just simply a comparison mechanism effect. And in terms of volume and price, I can tell you that the split remain substantially the same that we experienced in the past quarters, in particular in the third quarter, volumes accounted by 35% of the reported growth and 65% was still related by prices. Please Paola go on with your questions.

So my first question was on the several M&A opportunities that you are considering and I was wondering whether there is a ranking from your side [ what can be more ] likely and also what is more desirable to you and also providing that in case more of them come to point where they can be [indiscernible] or the ones we do select which one would you select? Second question is about your trend in special products. If you can have a little bit on the underlying dynamics adhere, especially with regards to the contracts that you signed now -- a couple of years ago and that in particular because in Q3, I think we had a negative top line and also in terms of profitability. So I was wondering whether there is anything that can [ temporary option ] should be aware of. Also in terms of B2B, my understanding is that the toughest comparison and therefore now [indiscernible] evident slowdown and volume at [ present ] B2B segment. So if you can elaborate here as well, what kind of relationships that drove growth in the last [ few quarters and to understand ] these commercial relationship in that [ field ] going forward. And sorry, very last question. You mentioned that your expectation for Q4, [indiscernible] You said that you expected to improve profitability. Compared to Q3 and also Q4 '22. I'm just wondering if you can elaborate on that, whether we're [indiscernible] in absolute terms in percentage terms and what are the underlying drivers in terms of input cost, you seem to be benefiting from [ best conditions ] to the extent. Is this going to be maybe even more evident in Q4 and on the other side, what we should expect in terms of amortization of prices which is [indiscernible] from the previous question. Thank you.

Starting for the first one related to special products. So special product in substantially [indiscernible] normal level of growth. We have not linear performance quarter-by-quarter because we have the implementation of new products and new lines especially in old and also new clients for the mid business. And this obviously would create maybe a different performance month by month and quarter by quarter, but it's just a sort of organizational technical not recurring situation. We believe that in 2024, the reported growth could accelerate versus what we are going to report in 2023. And in any case, apart from this, I would say, the organizational impact we continue to have what we can consider a normalized level of growth for the food category, nothing particular, I would say, negative even if -- as I said, there is a different performance quarter-by-quarter, but it's just, as I said, a technical issue. In terms of B2B, we continue to deliver and to increase and to strengthen our relationship with different player in the discount segment in the retail segment and this continues to be, for us, an area of strategic focus, also considering that, as you know, we continue to have spare capacity in some categories. And for us, it's important to try to reach new volumes and to strengthen our relationship with players that are -- I would say the growing one today, in the food industry because especially thinking about the discount segment, the trend for this player continue to be very, very strong. And as a general comment for the profitability, I can tell you that as we said, the driver in profitability that we experienced starting from the second quarter of last year was something that temporarily and driven by the fact that we experienced some mismatching between the increase of input cost and the possibility to complete the pass-through. Now the pass-through is substantially complete. I think that this quarter reflected what is our say, underlying level of profitability, and this must be the target for the future. It's clear that if additional maybe acquisitions or maybe additional investments in new projects in new countries, this could maybe have an impact on the profitability. But if we image the company to continue to grow in the coming quarter with the current structure of the business, I think that the third quarter reflected what is that -- the actual underlying level of profitability that is above the level that we experienced before the inflation wave. As you remember, this means that apart from the effect linked to the price increase, we also got important results in terms of efficiency and underlying margin improvement. About the M&A that was the last point you asked about. We are involved in several potential deals in Italy and outside Italy. It's clear that we continue to follow with a lot of invention and a lot of interest a very big deal that we highlighted in our presentations before, it's clear that this is a very interesting opportunity for the group. It's a transformational deal and we are negotiating and working hard to try to be able to communicate as soon as possible to the market a positive evolution for this deal, but this is not the only one. There are also other deals maybe -- and they're obviously, smaller than this one. But in any case, at the same time, important because all the business all the deals that we follow could allow the company to enter a new business and to continue the diversification of the offer versus our customers. So I cannot tell you now more, but I hope that we will be able to share with the market positive news very soon. And just to answer to another question that came into the chat, asking about the guidance 2024. I think that is too early, and there are a lot of things on the table today to speak about the guidance for 2024. For sure, as we, I would say, demonstrated in this year and also in the past. We continue to be very focused on growth, business development, underlying margin improvement and also M&A that remain one of the core business of the company. One is food and the other one is M&A.

We have another question actually coming from [ Stefan P. ], who is asking for the next few months, do you expect the trade working capital in line with the last 3 quarters with similar collection of payment terms? Or do you anticipate returning to the trade working capital levels of 2021, 2022 [indiscernible] terms compared to those in the recent period?

Our target is to come back to a very efficient level of net working capital. Last year, we have been impacted by the inflation wave and the very tricky situations that everyone faced into the market. And now we are step-by-step try to get a strong position and situation that we experienced in 2020 and 2021. For this reason, I think that in Q4 also because it's a historical situation because always happen, we may be in the position to improve further the contributions from the net working capital in terms of cash flow generation. Are there other questions?

Seems there are no more questions. So in case you do have them, please feel free to send us an email and we'll reply with our answers. Otherwise, thank you so much for joining the call. And we'll see you very soon. Thank you.

Thank you. Bye.