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

Ladies and gentlemen, thank you for standing by. Welcome to Strauss Group Second Quarter 2020 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Monday, August 17, 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. Mr. Bardea, please go ahead.

Thank you. Good afternoon and good morning to everyone, and thank you for joining us for this conference call to discuss Strauss Group's second quarter 2020 results. With me today, as mentioned, is Ariel Chetrit, our group CFO; and Daniella Finn, Director of Investor Relations. You should all know that we filed our presentation and you can -- we published it. And it's -- today, it's on our website. We are pleased to report a solid second quarter for Strauss Group under the very special and unique circumstances of the global pandemic. As you can see in Slide #8, it all started around February, March and we believe at that time that it's around the corner that we will get out of it because of the vaccine or any other results. Today, we understand that there is no day after. We are here and it is here to stay. And we need to live and we need to learn to live with the pandemic. The corona in different countries, different tension and different speeds, but it will impact our life, as we can already learn. We are very proud in our second quarter results as we continue to grow our organic sales, expand market share and improve profit and cash flow. This strong performance is backed by a solid financial position. As you know, during the quarter, we raised ILS 700 million in a new bond offering, which will enable us further improve our debt structure. Ariel later will elaborate on that. As you can see in Slide #9, we manage our strategy during this period of time in a way -- let's call it in a dual strategy: on one hand, very close controlling expenses, cash and CapEx and really allocate to the right focus. At the same time, in all our activities and original plan for 2020, we manage them, and we have a great result on those initiatives. Let's talk a bit about the 4 major focus of 2020. From left, we see -- we talk about the strong operation. We gained market share. We have organic growth in most of the countries and activities and categories. Our profit is better and cash flow. Secondly, which is very important especially in this time, is to keep and to protect our financial flexibility to be ready for any surprise, external or internal. So as I say -- as I mentioned before, we optimized the debt structure and reduced the debt cost and keep high credit rating, which is very, very important always, but especially in a time of volatile markets. The third one is about the business continuity. As I mentioned, the idea of the action to protect -- or to manage better the cost and the cash allow us to continue all our program or initiatives, like building the factory in China, 2 transactions M&A in Brazil, et cetera, et cetera. At the same time, we invest in all our core initiatives, that -- the brands and factories in Israel and in the United States. So the business continuity is very, very solid, and we stick to the 2020 plan. The last one is what we call the revenue growth. Fortunately, our portfolio is a nice combination of mix between different categories, at-home, out-of-home, different channels so we can manage the revenue in a way that you can see the results -- the damage from the corona is -- didn't hit us in a severe way. So the strength of the portfolio and the mix are very helpful and allow us to report or to gain these results. So I will hand over to Ariel to talk and to report about the financial highlights of the quarter.

Thank you, Giora. Good afternoon and good morning, everybody, and thank you for attending this call. To continue what Giora said, if we look at Slide #10, we can see the financial highlights. We grew organically in top line this quarter by 1.5%; year-to-date, 4.9%. And we managed, although -- albeit all the challenges of this quarter and the first half, to translate this organic growth into a growth in our net income results and net income profitability. We grew 10% this quarter and 4% for the first half. If we look at Slide #11, we can see the trends that explain better what we're going through this first half and the second quarter of the year. We can see the sales segregated into retail sales and AFH sales and the EBIT trend -- monthly trend, January until June. What we can see is that we experienced the lowest part of this half in the month of April. And then we see a gradual improvement during the months of May and June. In June, we managed to beat next -- last year, the June of the previous year. In retail sales, we almost managed to be the same as previous year in away-from-home sales. And in the profit, we beat significantly our profit in June 2019. This trend continues. We see it continuing into July. And therefore, having the external environment, if it will remain the same, and of course, nobody knows what will happen, but as long as this remains the same, we expect to see this improvement during the third quarter. In Slide #12, we can see the currency headwinds that we see this first half and specifically and more intensely in the second quarter. We thought it is necessary to mention it in a separate slide because the currency translation this quarter is dramatically higher than we are used to in previous quarters. It affected our results by 7% to 8.5%, the different items in our P&L, and it is significantly higher than what we've seen in previous quarters. If we look at Slide #16 and 17, we can see the main events and main challenges and successes and opportunities in the different 4 segments of our group. Let's start with Strauss Israel. We see a very strong quarter, both top line and bottom line. That was mainly led by the at-home consumption increase during this quarter. As Giora said, our categories in Strauss Israel are well fitted to consumption at home, and therefore, we can see a very stellar growth at these categories. On the other hand, we can see a slowdown -- material slowdown in our AFH channel in Israel and our impulse products. In Fun & Indulgence, we have many impulse products, snacks that's called single units and are consumed at home but mostly out of home, both on the go and in convenience stores, et cetera. And we see a material slowdown in these activities that affected us negatively in Strauss Israel this quarter. We see an increase in productivity, both long-term productivity in our factories and logistics and also short-term productivity, which is a product of the corona circumstances, less activities that we're doing at this time that are not relevant to corona like gatherings and other activities that we do in meetings with a lot of people and also traveling and other expenses that are saved during this period. And all of this is with a continuance in improvement in our market share in Strauss Israel for the fifth year already. In Strauss Coffee, what we see additionally to the currency depreciation, mainly the Brazilian real, we see an increase in green coffee prices due to the weakening of the local currencies in Eastern Europe and Brazil against the U.S. dollar. Therefore, the green coffee purchasing prices effectively rose significantly by a few percent, anywhere between 3% to 8% or even 10% in some places during this quarter, which eroded materially our gross profit and profitability. Also in coffee, away-from-home channel is more material than in our other segments and affected our results negatively this quarter. We should mention the 2 acquisitions that we've made in Brazil: A tal da Castanha, the milk substitute small company that we acquired. We already included -- started to include its results in our second quarter report; and Mitsui, which is a coffee company in Brazil which holds around 3% of the coffee market share in Brazil, which will be included in our report at the middle of the third quarter. Our market share generally in most of our coffee activities and countries is stable this quarter. Looking at Strauss Water. We can see a very nice gradual improvement in our results. Starting with Strauss Water Israel. The sales grew only by about 1% this quarter. But to tell the story more accurately, April was a very difficult month for Strauss Water since visiting households and putting appliances -- water appliances in households was effectively undoable. Therefore, we had an activity in Strauss Water Israel only during May and June. And in these 2 months, we sold the same as we sold in the 3 months of the second quarter of 2019. Therefore, we're very positive about our results in Strauss Water Israel this quarter. Also in China, we can see a very nice improvement in the second quarter. The first quarter was corona -- the corona quarter in China. To remind you all that corona started there in January or the end of December. And in the second quarter, we can see a very nice improvement. Our online channel is blooming. We are #1 in our market share there. And our sales during the second quarter were 4% higher than the second quarter of 2019. We also had -- are maintaining our stable high double-digit net income profitability in China in this quarter. And we had, in addition to that, a onetime income of a subsidy that was given to our activity there for building the new factory of the point-of-use machines. Last but not least, Sabra and the International Dips & Spreads. It was a very challenging quarter. The good news is that the hummus category in the U.S. is growing. To remind you all, it was stable and even declining a little bit in 2019. In 2020, we see it growing maybe and mostly because of the at-home consumption of food. So the -- also at-home consumption of hummus is growing, and the category is growing by 5% this -- almost 5% this first half of 2020. The bad news is that we were not able to accommodate this high demand in the second quarter due to problems we had in our supply -- in our factory supplying and fulfilling the orders because of lack of sufficient workforce in the factory for several days during this quarter because of the isolation because of the positive cases and the regulations of cleaning the factory. Each time we have an event of a positive corona in the factory, we suffered from this supply problem and therefore seen a decline in our sales. In addition to that, obviously, the away-from-home channel is very low activity this quarter. And therefore, the lower results in Sabra this quarter, we are quite positive about being able to recover from this challenging quarter. We already in July see some kind of improvement in our supply chain. And since we are still seeing the high demand, we are hoping that we will be able to meet these demands in the second half of this year and enjoy the growth that the category is experiencing nowadays. We can see all these effects in Slide #20 in the bridge sales (sic) [ sales bridge ]. We can see the contribution of mainly Strauss Israel. And we can see the dramatic effect of the translation of currencies on the sales. And the same for the EBIT bridge in Slide #23, we can see that without the translation effect of ILS 17 million, our organic EBIT grew dramatically this quarter and mainly due to the contribution of Strauss Israel and the contribution of Strauss Water. In Slide 26, we can see specifically the results of Três Corações, our JV in Brazil, in 100% in Brazilian real. We can see a very nice growth in the top line due -- mostly due to volume growth, which is excellent news because coffee and other categories -- and we're also, as we told you the previous time, exporting green coffee to abroad, outside of Brazil. They are all blooming at this period. Also in Brazil, we can see that the at-home consumption is growing like we see in other countries. But the negative side of this quarter was the very steep increase of green coffee prices in Brazil, which eroded significantly our gross profit and profitability. And therefore, this erosion went down into our EBIT line due to our constant costs that remained the same. And the next slide, 27, we can see the Sabra result. As I explained, the decline in sales is due to supply challenges and AFH low activity. But please take into consideration that EBIT profitability is 12.8% and also for the first half, more than 11%. As we told you last year, we expect the profitability of Sabra to be around 11% to 13% over time. And the profitability next year -- in the previous year, sorry, in the second quarter and the first quarter was significantly higher than the usual because of the low marketing expenses that were expensed in 2019 the first half. In Slide #28, we can see the increase of 10% in our net income, improving our net income profitability to 6.9%. We can see an improvement in our taxes on income. That is due to both the fact that in the previous quarter in 2019, the effective tax rate was higher than usual due to higher tax provisions that we've made in the second quarter of last year. And this year, we lowered our provision for taxes due to understanding that, going forward, distributions that will be made from held companies in the group will be -- will have lower tax rates than we thought they would. At Slide 29, we can see our gearing and net-debt-to-EBITDA. So our gearing ratio is 1.6, quite low and very solid. Also our net debt lowered to around ILS 2 billion. And last but not least, in Slide #30, we can see the results of our debt structure optimization, raising the ILS 700 million debt with a duration of 10 years with a very low -- relatively low interest rate of 1.9%, leaving our grading AA+. And we can see the effect going forward. We will see a decline in the effective interest rate on our debt portfolio. In 2020, it will decline to 3.1% from 3.6%, and it will further decline in 2021. The debt -- duration of our debt portfolio is doubled. And the average annual debt repayments in the next 2 years will go down by more than ILS 100 million per year. This will clear us a very nice amount of a few hundreds of millions of shekels to use for our activities in the future and implementing our strategy. At this point, I will end my session and be happy to hear some of your questions.

[Operator Instructions] The first question is from Tavy Rosner of Barclays.

This is Chris Reimer on for Tavy. You reported strong margins since the beginning of the year. And I'm assuming with the COVID crisis, this has -- margins have come under pressure, on one hand, from increasing workplace safety, hygiene and all kinds of things having to do with production versus some benefits you might have seen from other operational things like lack of travel and stuff like this. So I'm wondering if you could shed some color on how we should be looking at margins. What part is COVID related? And how long do you think that might last, these effects?

Okay. Thank you, Chris, for the question. First of all, let's put aside the translation effect, okay, just to talk about the business side. What we see is that, on one hand, of course, we have larger costs related to COVID, as you suggested. On the other hand, we have a higher rate of productivity also related to COVID, okay? So we are seeing that they are negating each other. Therefore, let's say the COVID costs and the COVID savings are negating each other and that they're not affecting, at least not materially, our margin. What affects materially our margins at this quarter -- at the end of the previous quarter but mostly this quarter is 2 things. One is the green coffee prices. The increase in green coffee prices was material. And as you know, we did not have any time to adjust our selling prices -- selling coffee prices. And these times of COVID, it will be also challenging to adjust the prices. Eventually, of course, we will do it. It's a matter of time, but it's more of a challenge because of the economic crises in the different countries. It will be slower than usual. So this is the first major effect on our margins. The second negative effect on our margins is the away from home. This is more of a temporary effect because, as I've shown you and as you have in your materials, we are on a gradual improvement. And therefore, the effect will be lower in the next quarters as long as the COVID situation is not getting worse than it is now. So the AFH platform is -- in this quarter was very low in terms of sales, but the AFH cost platform remained pretty much the same. We did not send any employees home and we kept our infrastructure because we knew that it's a temporary issue. And therefore, our margins in AFH are very low, if not losing for this quarter. So these are the main 2 triggers that affected our margins. Green coffee is temporary, but it will take time to adjust selling prices. And AFH is temporary due to COVID improving in time and gradually continuing to -- or coming back to sell in this channel.

Okay. That's very helpful. And the difficulties you had with the Sabra -- in the Sabra division, do you think that's come back to some -- a normalized -- more normalized activity? Or do you still see the workforce problems that you had before?

No. There is no question about normalized activity. During the last couple of weeks, we already have, let's say, very good results in the factory. It means that we are -- increased inventory means that we can supply all the demand from the market. And we don't see any impact in the future, just to stabilize the situation of the factory. There's no issue with raw materials, with machinery, just about workforce and the culture there that the people will trust the local leadership and stay at the factory and do their job.

Okay. And just one other question on the Mitsui acquisition. Can you give a little color about that company and how you think that it will impact your activities in Brazil?

Sure. So Mitsui is -- as I told you, it's a coffee company that holds around -- about 3% of the market share in coffee. It has a great synergy to our activities in Brazil because it operates more in the central part of Brazil, where our market share is on the lower side between, let's say, 15% to 20%. As you know, in Brazil, we're 28% market share, so it's more the lower side. So it completes us very nicely in this geographical segment. And it also completes our categories portfolio of coffee because Mitsui products are more on the economic side. So it gives us its strength -- it gives us a lot of strength to the economic portfolio of our products. So geography- and category-wise, it completes our activity in Brazil. And especially at this time, when we see the economic crisis also in Brazil, it's a great timing to introduce this product into our portfolio.

[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.strauss-group.com. Mr. Bardea, would you like to make your concluding statement?

Yes. Thank you. So as we said before, we are learning. We are adjusting ourselves to live with the corona and the recession. We focus on managing the cost and the cash at the same time to continue all our strategic investment that will enable us to get out -- to get off the pandemic much stronger. We used to say in Strauss, "Know more to survive with the corona." Now we need to win and to be ready for the day after. So thank you so much for joining us, and hope to see you face to face in future.

Thank you. This concludes Strauss Group Second Quarter 2020 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.