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

Ladies and gentlemen, thank you for standing by. Welcome to Strauss Group Third Quarter 2020 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, November 18, 2020. I would like to remind everyone that this conference call may contain projections or other forward-looking statements regarding future events or the 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 documents filed by the company with the ISA. With us online today are Mr. Ariel Chetrit, CFO; and Ms. Daniella Finn, Director of Investor Relations. Ms. Finn, please go ahead.

Hi, good afternoon. Thank you very much. Welcome, everybody, to our third quarter results. Unfortunately, Giora Bardea, CEO, will not be able to join us today. But I'm very happy to pass on the mic to Ariel Chetrit, Group CFO, who will look at our quarterly results, and then we shall take any questions you may have. Ariel, please go ahead.

Thank you, Daniella. Good morning, and good afternoon to everybody. We're happy to be here with you as always. Again, I'd like to take a few minutes to first talk about the general trends and shift that we see in the past roughly 9 months since the pandemic has begun in the food and beverage world. And then we'll go through the financial results, main financial results. So if we look at Slide #10 in the presentation that was sent to you, you can see the main shift that we see in the consumers' arena, in the food and beverage industry, and it's a shift that many companies are going through in this period. Of course, these are only a few main shifts that we are mentioning here just to paint the picture of this period in more vivid colors. So if we look at the consumers' side, we see a very strong phenomenon of the nesting and lower mobility, which results in higher -- significantly higher consumption of food at home with the family for more hours and for a long period. Less vacations, less going outside, therefore, all the activities of the food consumption are mainly made at home. The second consumer phenomenon that we're seeing is a change in mindset, but in very -- a variety of different directions. Some of the directions, we see a steep increase in cooking and baking activities in home. Now that we're many months into the corona, we see also many people and families that are tired of cooking and baking at home and are looking for different solutions, like ready-to-eat or ready-to-heat meals, frozen meals, et cetera. And the mindset is changing in different directions. There's also very significant phenomenon that we see in the -- in the mindful spending. We see that people are more cautious about the expenditures that they make. The disposable income is going down. Also a big chunk of the expenses of households are going down also because less expenses are on fuel and on traveling, et cetera. But also, people are very mindful about how they buy their food. And in some places, we see a strengthening of the private label. But in other places, we see a very strong strengthening of the good old brands that food companies have. People are going back to these brands, and we see, therefore, an increase in the brands alongside with some increase of private labels in some countries. If we talk about the food and beverage industry, we can see that the retail performance as far as it relates to food, both in the retail for consumption at home, is going up quite steadily for the past 6 or 7 months. Even after the final consumption that we've seen during March and April, we see a steady increase in consumption from the retail for products to be consumed at home. We also see a very strong channel shift. The channel shift that we see is, of course, the decrease -- dramatic decrease in the away-from-home channels, in the on-the-go channels alongside with increase in the retail food-for-home channels that I spoke about before. Of course, needless to say, restaurants and other activities are struggling and are in survival mode at this period. I won't go through what companies are experiencing at this period because most of you, of course, are very familiar with that because you follow many companies around the world. So I'd just say that we are facing the same phenomenons of focusing on our core operation, on our supply chain, employment from home and remote employment, et cetera, as other companies do. If I move on to Slide #16 in your presentation. We can see the executive summary, the -- how all these trends in shift affect Strauss. We can see that we are still delivering very solid financial results despite all these phenomenons and trends and the uncertainties. We can see an increase, very nice increase of at-home consumption, which is reflected in our organic sales increase. And it is offset, but not entirely, just a little bit, by a decline in the away-from-home channels, mainly in our coffee activities, but of course, not only. We are continuing to put an emphasis on our operational excellence, on mitigation activities, on our productivity and on our financial flexibility. You can see that the steps that we took in the past 2 quarters, managed headcount to reduce dramatically the OpEx expenses compared to last year, and decreased our net debt and also net debt-to-EBITDA ratio, and also decreased our financial expenses on our debt portfolio. All of these steps are strengthening our position and giving us room to reinvest in the business, in our core activities, in our brands, in all kinds of CapEx, strategic projects that -- and also M&A strategic projects that we reported about to name a few. The investments in the new point-of-view factory in China, a new fresh-cut vegetables factory in Israel, a new logistic center in Ukraine, the 2 M&As that we've done in Brazil of Mitzui Coffee Company, and also the mixed substitute joint venture that we've done there. And the entrance into mixed substitutes with Alpro in Israel. Of course, needless to say, as always in Strauss, we also care for our employees and our communities, and we spend a lot of effort and resources to make sure that everybody that is working with Strauss, in or outside with Strauss, are surviving and also possibly flourishing together with us during this period. If I move to Slide #19 to talk a little bit about our looking forward trend, we are planning for at least another year of corona ahead of us. Hopefully, maybe we will have good news and things will become better sooner than that. But we are planning at least for 2021 as a year of continuance of corona and social distancing, and therefore, we must behave accordingly. So we are continuing to adjust our products and categories and innovation to fit the relevant trends and shifts that I spoke about before to maximize our growth and sales. We are continuing to invest in CapEx and look for new strategic projects. And as you've seen, we have the financial flexibility to do so. And we are planning to continue to assimilate and grow our new acquisitions in Brazil. And to engage in production of our new plants in China and Israel and our logistics facility in Ukraine. And we are sure that these facilities will be very productive next year. Continuing to Slide #21. A view -- highlight view of the financial results. The financial trends in Q3 are quite similar to the trends that we've seen in Q2. And therefore, the year-to-date results are not very far from what we see this quarter. We are growing organically because of the trends of at-home consumption that we spoke about at a 4% rate in Q3 and the 4.5% year-to-date. Once we take into consideration the translation effect of the foreign currencies, mainly the Brazilian real that has devaluated against the shekel by around 30% at this period. We see a decline in our Israeli shekel sales of 3.1% this quarter and 2.2% year-to-date. We also see a slight decline in our gross margin and our gross profit. I will explain it briefly very soon. And although this decline in our gross margin, we see an improvement in our EBIT margin. And we see stable EBIT through this quarter and year-to-date. Our financial steps that we took, mainly optimizing our debt portfolio and lowering our financial expenses, helped us dramatically and helped us to improve our net income, and also our net income margin and our EPS is improved also, accordingly. If I go on to Slide #25, we can see the sales contribution of the different companies. On the right side, below of the slide, we can see the growth excluding the FX effect. And we can see that Strauss Coffee has grown organically 1.4%. Again, a larger growth, mid-single-digit and sometimes it's even low double digits in the retail consumption of coffee-at-home channel. But it was reduced by the decrease, steep decrease in AFH activity during this quarter. As you all know, the AFH activity in the Coffee company is larger than the AFH activity in the other companies. And therefore, its effect on the growth of the company is larger than in other companies. In Strauss Israel, we see a growth of 6.1%. And it's continuing to grow very nicely and also above the market. Therefore, we're gaining market share in the relevant categories that we're playing in. And also in Strauss Israel, we see different trends. Again, the food consumption at home is rising, and we see the growth of even low double digits in dairy products, in salads, in fresh products, in our Yad Mordechai olive oil and honey product and also in our chocolate tablets. All of these are going very nicely, but this growth is reduced when we see the decrease in the AFH channel and also the impact for that, that are growing less or even declining in Israel. In our Dips & Spreads segment, we see a slight decrease of 1% in local currency. This is mainly due to, again, different shifts. On the one hand, we see an increase in the home consumption of hummus in the State and in other places that we play in [indiscernible], Australia, Germany and Mexico. But this increase is negatively affected by the decrease of the away-from-home channel and the profitability products that are the, let's say, hummus impact product, the Sabra sales in many AFH and on-the-go channels. And again, this quarter, as we've seen in the previous quarter, there were some supply cuts that did not allow us to supply the whole demand from the retailers. But what we see during September, the last month of this quarter and afterwards, in October and November, we see that we are supplying almost 100% of the demand. We have corrected our problems in our production and the logistic center in Virginia. And now we're managing much better the low rate of attendance of employees that are -- sometimes happen in the factory due to COVID-positive results of employees. And in the Water segment, we see a dramatic increase in sales this quarter of more than at 10%. Just to remind you, the sales here are the sales of Strauss Water Israel and Strauss Water U.K., but mainly, of course, Strauss Water Israel. Strauss Water China is in a different line in the P&L, which represents our 49% stake in their net income, but not represented here. But we see a very high increase in sales in Strauss Water Israel due to, again, more consumption of food and water at home, the nesting at home and the preferences of a household for healthy and good quality water. And the same effect we see in China with the growth in sales there in local currency of almost 7% this quarter. If I move on to Slide #27, we can see these trends in like-for-like terms first in the months of this year. We can see that, again, on the left side, the retail sales are much higher than last year. The first quarter dramatically higher because of the panic consumption. But afterwards, we see a steady state of an increase in sales in the second and the third quarter in the retail channels. But in the away-from-home channels, we can see that, even though there's a slow comeback of the AFH from May on, we can see that still, the AFH sales are at least 30% to 35% lower than the normal rate as seen here for the last year. If we move on to Slide #28, the gross profit, which, as I said before, gross profit and profitability are decreasing, mainly due to 2 reasons. The first, obviously, then is the negative translation effect of almost ILS 50 million. And this is -- 80% of this is due to the devaluation of the Brazilian real, but also a decline in Strauss Coffee gross profitability due to a steep increase in green coffee prices this quarter. Green coffee prices had begun to rise during the previous quarter, the second quarter. We spoke about it. This increase in prices is mainly seen in Brazil, which is an insulated market in terms of the coffee. And since the Brazilian growers are now more stimulated to export their coffee crops, therefore, the in-home Brazilian coffee prices are going up because there is less supply of coffee in Brazil. And we've seen this quarter a steep increase of around 10% compared to the previous quarter in last year. And therefore, a decrease in the gross profitability. If we move to Slide #29, you can see that this decrease in gross profitability, even in local currencies, is negated when we look at the EBIT profitability. We can see that, excluding FX effect, there is a growth in EBIT of almost 5%, and you can see that, even in Israeli shekel, there's a nice stability in the EBITDA number, ILS 250 million compared to ILS 256 million in the third quarter of 2019. And an increase in the EBIT margin from 11.4% to 11.5%. This is just to show you that our mitigation, productivity and efficiency program, helped us to low, to negate this increase in the green coffee prices and most of the FX effects. And also the AFH negative effect also on profitability. If we move to Slide #31, we can see that the EBIT margins are improving very nicely in all of our segments, except for the Strauss Coffee segment, mainly due to the increase of green coffee prices, as mentioned before. In Slide 36, we can see the net income, which is growing from ILS 153 million to ILS 158 million this quarter in 2020. And it's a nice growth of a little bit more than 4%. And a very nice growth in profitability from 6.8% to 7.3%. And you can see that constant growth in profitability -- net income profitability along the years from 2016 (sic) [ 2017 ] up until now where we were a bit more -- a bit higher than 5%. Now we are considerably higher than 7%. And again, it is made also by a nice contribution of the decrease in finance expenses. We can see in Slide #38 that the net debt is going down, and we have optimized our debt. Our net debt-to-EBITDA ratio also went down to 1.6, which is very solid and put us in a very good position for future strategic investments, which we will hopefully have. And, of course, inform you about next year. I will end with this. And at this point, I'll be happy -- Daniella and myself will be happy to answer any questions that you have.

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

This is Chris Reimer on for Tavy. I wanted to ask about Brazil and the growth there this quarter. How should we be looking at that area? And if -- what part of the growth was related to the recent acquisitions?

Thank you, Chris. The growth in Brazil -- let's say -- separate it into -- again, Brazil is affected by many different shifts. First of all, 10% growth in this quarter in Brazil in continuance -- and we are continuing our growth in volume and value in local currency, of course, very nicely with a stable market share. The growth this quarter was mainly affected by the core activity. The influence of the M&A of Mitzui was very small, less than around ILS 10 million. And maybe you can say that, 1%, 1.5% of the growth is due to because we only started to consolidate Mitzui during the second half of this quarter. So it has only a very marginal contribution. We're very happy with this growth in Brazil. It says that the market there is awake. Coffee consumption is there, and this is the most important thing for us. We are also growing nicely in our capitals and machines in Brazil. And we are very happy when we look at the top line. And of course, such a steep increase in such a short time in green coffee prices in Brazil, 10% is nothing that we can compensate for so shortly. Therefore, you see the strong decrease of the gross margin and gross margin profitability during this quarter. We have started our efforts to adjust selling prices to retailers in Brazil during the second half of this quarter, during -- mainly during September and October after this quarter. We see a slight increase in prices, but we have to have a lot of patience because of the crisis in Brazil. There's also, of course, an economical struggle in Brazil. We know that this time, the prices will adjust more slowly than the usual rate. And therefore, we feel and think that we will manage to adjust the price, the selling prices, and therefore, return our gross margin profitability back to normal during sometime next year in 2021. And that's about it.