Strauss Group Ltd. (STRS) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to Strauss Group Fourth Quarter and Full Year 2019 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, March 25, 2020. I would like to remind everyone that the conference call may contain projections or other forward-looking statements regarding future events or future performance of the company. These statements are only predictions and may change as time passes. Strauss does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of changing industry and market trends, reduced demand for our products, the timely development of our new products and their adoption by the market, increased competition in the industry and price reductions as well as due to risks identified in the documents filed by the company with the ISA. With us on the line today are Mr. Giora Bardea, CEO of Strauss Group; Mr. Ariel Chetrit, CFO; and Ms. Daniella Finn, Director of Investor Relations. Ms. Daniella, would you like to begin?

Yes. Thank you, Lea. Good afternoon, and good morning, everyone, and thank you for joining us today, especially given these strange times we're all in. We are going to discuss today Strauss Group's fourth quarter and full year 2019 results, which we published today. With me today are Giora Bardea, our Group CEO; and our Group CFO, Ariel Chetrit. By now, you've probably all had a chance to review our results and our presentation, which we published earlier today and can be found on our website under the Investor Relations section. With this, I'd like to pass the call over to Giora Bardea, Group CEO. Giora, please go ahead.

Thank you very much, everyone, and thank you for joining us. It's a bit weird to start talking today and summarize 2019, which looks a little bit a piece of history or maybe even irrelevant history. But we're happy to do that. And especially in our case, in Strauss' case, which I believe -- and in a moment, we'll explain why it's very relevant because the great success and the great result, strong 2019, following 2018 and '17, places Strauss or takes Strauss in a position that we believe will help us to overcome and to cross this very challenging period of time. I'll talk about the resilience of the management team, the financial cash profitability, infrastructure, people, et cetera, et cetera. And Ariel will elaborate on that in a minute. But a couple of words about the future. From our experience, although this is a very unique crisis and the uncertainty is huge, we believe that the main challenge for our management team and company is focus, focus and focus. And we choose 3 major challenges, 3 major focus that we are managing now and trying to put aside all the rest for the next couple of months in order to make sure that we are running the right agenda, the right priority and we take our people, capacity, money to one clear direction, which is to cross the crisis. The first topic, the first focus is people health. 100% no compromise about people health, and we do and we invest all we need to do in order to protect our people and their family. And as I said, no compromise about that. If someone doesn't feel well and they need to stay home, and we will protect -- all the mask and the rest of the equipment, we are there to provide our people all over the world and to protect their health. Second, which is very interesting and challenging. The first reaction from the people all over the world was to start stocking of food. We understand that food at this time is very important for people. It brings them a feeling of a bit secure, homey and we understand it and we're responsible to fulfill the full demand for the market. No matter if it's the coffee, dairy, salads, water, whatever. So we manage the supply chain in order to fill the demand of our consumer and customers all over. Last topic, the third one is what we call business continuity or resilience, which means that we need to protect, to manage the full value chain, value chain from raw materials all the way to the factories and to the distribution and to the shelf. We need to manage the people that we need to have near the machine, truck, shelves, office and, for sure, the cash. It means that we are very close managing. We have good business continuity in all aspects of the business continuity in order to protect and to run the business in the uncertainty of the coming future. Now after a little bit about the future, let's go back to 2019, and I hand over to Ariel, the CFO of Strauss Global Group, to share the results of '19 and talk a bit about how we look in the scenarios of 2020. Ariel, please.

Thank you, Giora. Good afternoon, and good morning, everybody. Thank you for joining us. I would like to talk a little bit about Q4 and the full year of 2019, maybe it could seem a bit less relevant nowadays. We've talked about this in the past, and I will do it briefly. But I think that it is important to go through the performance in 2019 for one main reason, and that is to better understand how we are positioned today, while facing big challenges that we are experiencing today and also in the future. There is no doubt that we are beginning the year in this challenging in 2020 very well positioned. We are in the right field of activity. Food and beverage is most certainly a field, where in this crisis, advertises the necessity and the importance of making sure that everybody has enough food, beverage and supply in their homes and the places where we stay at in these hard times. But with this good positioning comes also a great responsibility of making sure that our supply chain work efficiently and in an orderly -- ordinary fashion all the time. So if we start with a brief summary, we look at Slide #6 in the presentation. We can see that the trend of Q4 and the whole year of 2019 are quite the same when we look at the group level. Top line sales, organic, excluding FX, we grew between 2.6% and 2.7% this year. Most of the growth comes from, sorry -- from quantity. So most of the growth is the volume growth. And the growth leverages down the P&L, the different P&L line, in the gross profit, the EBIT and the net income line. You can see that as we go further down, the leverage is higher and higher. You can see that in the net income line, we grew between -- 12% annually and almost 15% quarterly -- in the fourth quarter of 2019. And last but not least, today, we announced a dividend distribution of ILS 180 million. We believe that Strauss is stable, and we believe in its capability to perform well business-wise and financial-wise in a challenging time. Therefore, we decided to distribute the dividend, while taking into account the different circumstances, and hence, the decreased amount of dividend of ILS 180 million compared to ILS 200 million that we distributed last year. If we go to Slide #24, you can see the long-term journey that Strauss Group is doing. On the left side, we can see the growth in the top line organically, excluding FX, more than 4% annually CAGR. And on the right side, you can see our very impressive EBIT and net income growth during the past 3 years, 7.6% CAGR EBIT growth and almost 15% CAGR net income growth. If we look at the different companies, we go to Slide 38 to 39, you can see that Strauss Israel is a very strong performer in the group this year. Actually, in the past 4 years, Strauss Israel is growing rapidly in the Israeli market, well-saturated Israeli market, increasing its market share in each year over the past 4 years and growing this year more than 4% in sales and leveraging the growth through also productivity to the bottom line, to the EBIT line and growing the EBIT line by 7.9%. Actually, all of our categories in Strauss Israel are growing very nice during this year. If we continue to Strauss Coffee in Slide 45 and 46, we can see that organically, including FX, Strauss Coffee is stable in its top line. You can see 2 key trends direction that affects the top line of Strauss Coffee. The negative direction is the negative translation effect, currency translation effect, and the lowering of selling prices due to decreasing green coffee prices in the past 1.5 years. And the second positive trend is growing volume. And those 2 effects negate one each other. And therefore, we're quite stable in the top line. Having said that, when we go to the EBIT in Slide 46, you can see the growth in our EBIT both in the fourth quarter and in the whole year of 2019 due to increased margin and, of course, also the leveraging of the volume increase in our sales. Going to Slide 49, we can see that our decent spread, the activity around the world, but mainly in Sabra, North America is doing very well this year. Organic growth of 6.4% annually and 7.3% the last quarter of 2019. And in the bottom line, we grew 35%, almost 36% in EBIT in Sabra and almost 45% when we look at the whole international business spread activity this year. The last quarter was almost flat. That -- this is mainly due to the fact that most of our advertising expenses, marketing expenses were made in the second half and mainly in the last quarter of 2019 compared with last year, and therefore, the flat result. Business-wise, we are openly growing, and the annual figures represent that very nicely. In the -- last, but not least, the activity of Strauss Water in Slides 51 and 52. We can see in Slide 51 that sales grew annually more than 6%, in the last quarter of 2019 more than -- almost 8%. This mostly is due to Strauss Water's Israel activity. I remind you that Strauss Water China is not consolidated in the top line and is only taken as a one line item in the EBIT line. So our share in Strauss Water China, you can see on Slide 52, was ILS 32 million Strauss Water China profit, sorry. It was ILS 32 million in 2019, ILS 9 million in the last quarter. We can see an increase in the EBIT of both Strauss Water without Strauss Water China and also Strauss Water China during the past year. And in the fourth quarter, we can see a decrease in Strauss Water China. We thought that this is mainly due to an almost ILS 2 million onetime income -- tax income that was registered at the fourth quarter of 2018. And therefore, if we exclude that, we see also a growth in Strauss Water China profit. If we go back to Slide 21, you can see the leverage status of the group, lever status of the group in the past 4 years, and we can see that we are positioned very well at the beginning of 2018 with a leverage rate of 1.6 net debt to EBITDA. And it is very important to mention that we have secured ILS 500 million of credit line to help us face any challenges that will come in the year and further future. And therefore, we think that we are well positioned for all kinds of scenarios that might happen in the future. And we are also well positioned to invest as much as we need to invest in order to make sure that we activate our supply chain in the most effective and orderly way. These past weeks, since the coronavirus really spread into the, let's say, Western world from Eastern Europe to North America, in our activities, we experienced an increase in demand for our products. In some places, the increase is moderate. In other places, it could be 20% to even 50% higher than what we usually experience in this time of year. And we are doing our best to supply all the demand. Up until now, we're doing a pretty good job in managing that. Concerning China, China is starting to go back to business as usual as long as it concerns to our activity there. So we have no supply issues or a production issue today in China. And also, in terms of supplying a machine from China to Israel, with the activity of strong quarter in Israel, we don't see any difficulties these days. I will end my part here and open the discussion for questions that you might have. Thank you very much.

[Operator Instructions] First question is by Tavy Rosner of Barclays.

This is Chris Reimer on for Tavy. I was wondering if you could comment around the staffing challenges, just regarding if you're staffing at minimum requirements or if you're still at above minimum requirements. And just any pressures you're seeing there with manpower and if you could further reduce given any higher quarantine measures taken in the regions where you're working?

Yes, thank you. We're -- today, we do not experience any material staffing problem. But of course, we have exact procedures for every activity in every country that we operate in. All of our back office, headquarter staff are working from home, all of them -- 100% or 99.9% are working from home. And I must say that our experience is quite positive with doing this. With relation to our staff in our production line and warehouses, we're working there as usual. We have some -- lacking in people, that's very little these days. Most of them are very committed and come to work, and we didn't experience any, let's say, positive corona incidences where we had to stabilize -- sorry, had to change our staff due to that. We are holding scenarios where we will need to mobilize people from place to place. We are now doing this by mobilizing some people that have less stuff to do to a selling point and to a selling task. And we're managing, doing it very well these days. And we are also preparing for different scenarios where we might experience a shutdown of a facility or a production line for several days and how to back up these scenarios if they happen.

[Operator Instructions] There are no further questions at this time. I would like to remind participants that a replay of this call will be available on the company's website at www.straussgroup.com (sic) [ www.strauss-group.com ]. Mr. Bardea, would you like to make your concluding statement?

Yes. Thank you all for joining us today. Thank you, Ariel and Daniella from our team. I would like to wish you all, you and your family, first and foremost, to stay healthy. These days, this is the real -- real pray and -- key for all of us. I can assure you that Strauss will continue to produce food and beverage and provide it to our consumers all over the world. And again, thank you for this afternoon or this morning. And hopefully, we'll talk next time in a better time all over the world. Thank you, and have a great day.

Excuse me. There is one more questioner, Tal Klausner from GIC.

I just wanted to get an update on what you're seeing in Brazil. And how are you being set up for shutdown measures or for other public health measures in that country regarding your supply chain?

As we said before, it's ongoing and very volatile days at this stage, at this moment, and we just had a Board meeting last week with our partners in Brazil. There is not any special restrictions. Yes, Brazil start to take the measures a little bit late than other countries. At this stage, we don't see any special activities or restrictions regarding the -- our activities in Brazil. So we continue to produce. We take all the measures regarding our people and to -- as I said at the beginning, about their health and to protect them. The demand is a little bit higher than the average one and the originally planned. At this stage, we don't see any special measures.

And Tal, Ariel. Just to add to what Giora said, in Brazil, we have several factories, several R&G factories. Some of them are smaller, some of them are bigger. And therefore, we have a backup system by increasing some factories' capacity once another factory is being shut down for several days. So this is part of our mitigation plan.

This concludes Strauss Group's Fourth Quarter and Full Year 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.