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 2020 results Conference call. [Operator Instructions] As a reminder, this conference is being recorded Monday, March 22, 2021. 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 marketing trends -- 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 due to risks identified in the documents filed by the company with the ISA. With us on 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 morning, good afternoon, everyone. Thank you for joining us this conference call to discuss the results for the fourth quarter of 2020 and the full year. With me today, as mentioned, are Ariel Chetrit, our CFO; and Daniella Finn, Director of Investor Relations. You should all know -- you should all, sorry, now have our presentation, which we published earlier today and can be found on our website under the Investor Relations section. Let's start with slide #8, which we call the resilience. 2020 was a quite year, actually 1 like none before. Above all, this year, we demonstrated outstanding resilience that enabled our business to continue. Business continuity. Our resilience and business stability is based mainly on some elements. First one is what we call the diversified portfolio, diversified category mix, home consumption and away from home strong brands and a wide variety of different channels. It means that we protect ourselves with different activities that can compensate one or the other. Second is our very strong Home base, stable, profitable activities in Israel, the Israel -- Strauss Israel, Strauss Water, Strauss Coffee. Third one is our financial resilience and agility, secure credit lines, cash and debt optimization that improved a lot in the last year. Number four, that we really appreciate is our team of great leaders and partners all over the world, while we need to work and manage remotely the resilience and the leadership of the local leaders are crucial in such days. When we go to slide #9, we talk about the momentum. At the very beginning of the year, last March, April, we took upon ourselves a plan of what we call mitigation plan, and we decided to save almost ILS 200 million. But at the same time, we committed and decided not to harm our future. So during the year, we continued to invest in our core brands. We didn't cut the budget for the core brands. We continued with 2 M&AS in Brazil and invested a lot in CapEx in infrastructure, 2 factories in Israel, 1 in China, 1 in Ukraine, et cetera, et cetera. So believing that the corona will over, and we should be ready in all our infrastructure for the day after. Third one, we continue to invest in our Filltech hub portfolio. We invest in 2 -- in 6 new very exciting startups that, we believe, down the road will create a lot of value. Looking to 2021. This is Slide #11. We believe that we should and we are ready to accelerate our path. Our stability, the financial stability and flexibility, our very strong leadership team all over, we believe that we are ready for the future. And we take a lot learning from the corona and turn before the corona. And now we are working and developing the new channels, new categories that we believe will emerge down the road and we invest a lot of time in money and learning how we can accelerate the growth there. Secondly, the -- as I mentioned about the financial stability, we are looking -- we are searching now for M&As all over the world. We believe that after a couple of years, where we've focused to establish or to sustain our financial, now it's time to accelerate the growth via either greenfields or M&As, and we have a special team that's running so. Slide #12 talk about the excellence. Competition is tough all over. And we understand that we should be excellent company in order to win the competition. When we talk about excellence we talk about -- and we have a special project with internal and external leaders and support that we should focus on first with the start of digital transformation. With the start of the corona and even before the corona, we understood that the digital transformation is crucial for supply chain, consumer heavy, data consumer, consumer data, et cetera. Second is a better operating model and process to be much more agile. We understand the speed of changes around us, and we should be much more agile as a company as a business model. And the third one, is better user usage of our cash. So we have a project of working capital to improve our working capital to release a lot of cash in order to invest, as I have mentioned before, in our future investment. Slide #13, talk about the sustainability. This is the last 1 that is not the least. I'm very proud, really personally and as the leader of the company, I'm very proud to publish today our 2020 Annual Sustainability Report, along with our financial results. We really believe that this is a demonstration of the connection and the interdependency of doing a good company, both in finance and the business and marketing, but at the same time, being responsible and sustainable company. And like public health issues better and safe nutrition, climate topic, diversity, social, et cetera. This is not another cosmetic , this is piece, this part of the essence. This is a part of the business, and we strive to continue to leave impact wherever we are operating. So we are very happy today to share. And I hope that some of you will find some time to download to our website and to really see and learn about our activities in order to leave better impact around that. So I give you my summary, and I will hand over to Ariel Chetrit, our CFO, to discuss the financial results in the quarter and more details. So please, Ariel.

Thank you, Giora. Good day, everybody, and thank you for joining us today. I'll walk through briefly the financial results for the quarter and the year. First of all, let's start at slide #15 where we look at the organic, excluding the currency translation effect results we can see that we had a very solid good year of 4.6% growth in the topline, 5.4% growth in the organic EBIT line and 9.2% growth in the organic net income line. We see these results are a very solid and good results also compared with the benchmark of the different food and beverage companies that have published their results for this year of the -- that was influenced very much due to the COVID-19 pandemic. In Q4, we see the same trend, except for the net income, which declined in -- 4.2% due to higher financial expenses. This project compared to the fourth quarter of 2019, and I'll explain it later on. It's also important to note is that we have declared a dividend of ILS 270 million. We are -- please pay attention that we are growing our dividend amount for the last previous 4 or 5 years. And this dividend distribution will be a distribution of ILS 2.3 per share. Going to slide number 36, just to stress the heavy effect of currency translation headwind for this year and the fourth quarter. So we [indiscernible] a presently had a very significant effect. All the currencies, the relevant foreign currencies in our activities devaluated compared to the Israeli shekel, and especially the Brazilian Real in the Russian Ruble which devalued by more than 20%, 25% compared to the Israeli Shekel as this year. Therefore, we've seen very large effect on the revenues and different profit lines, double or even triple the effect that we see in other relatively normal year. If we go on to slide number 41, we can see the annual sales. The annual sales grew organically by 4.6%. We can see on the right side the contributions of the different 4 segments of the group. We can see that Strauss Israel grew very a high 5 -- sorry, 7.9% in the topline, almost the same in the fourth quarter. And we see, on the other hand, that Strauss Coffee grew only 2.5% organically in the topline, 3.8% in the fourth quarter. And the main effect on the topline for the Strauss Coffee were the decline in the away-from-home channels, which are more present in our coffee business then in our other businesses, mainly in Israel and Romania. In the different sales segment, we can see a decline in organic sales of 3 this year, representing a decline in the portable products, the snack in personal Homes product, that were relatively very low in sales volume this year due to the closing of the away-from-home and on-the-go-way channels and occasions. And in the Water segment, we see an increase in organic sales of 6.4%. These are the sales of Strauff Water Israel and Strauss Water U.K. and let's remember that in the second quarter, there was a decline in sales due to the beginning of the CORONAVIRUS. And due to the inability of our technicians to visit in customers' houses. Therefore, we can see that in the fourth quarter, the growth in sales in Strauss Water segment was 13%. If we move to slide #24, we can see the sales in our 2 main channels, and we can see the COVID effects on our group this year. On one hand, retail sales grew by almost 7% like-for-like or without a currency translation effect. And we can see the different quarterly growth. And on the other hand, we can see the away-from-home sales, declining annually by almost 29% and the second quarter was the hardest quarter. But still, we can see a very slow recovery in the coming quarters, and we expect to see the same effect, at least, in the first quarter of 2029 -- 2021. But in Israel, we see a positive trend of getting out of the houses, now that the vaccination rates are very high. And hopefully, the away-from-home channels will reopen after the Jewish holidays passover here in Israel. If we move on to the gross profit, slide number 43. We can see that the annual gross profit organically only grew by 0.5%, and the gross profitability declined from 39.6% last year to 38.7% this year. We see the same trend in the fourth quarter. On the one hand, we had a major positive contribution to our gross profit and growth profitability from Strauss Israel. And on the other hand, we had a negative contribution to the gross profit from Strauss coffee. This is mainly due to the increase of green coffee prices everywhere in the world in the past few months. And in Brazil, almost for the whole year, we've seen green coffee prices increasing, and therefore, margin decreasing and going down. Hopefully, we will see this trend reverse in 2021, we already started to work on raising our lease prices in Brazil. And hopefully, the trend will reverse in 2021. If we go to slide number 44, and we look at the EBIT trend, we can see a continuous EBIT growth trend in the past 4 years, both absolute profit, both organic growth and EBIT profitability growing for the first year, above 11%. And we see the same trends in the fourth quarter of this year with improvement of 9% in the organic EBIT. And EBIT profitability grew from 8.6% to 8.8%. In slide #29, we see, again, the COVID-19 trends on the channels -- on the EBIT in the channel. We can see on the left-hand side that retail EBIT are growing nicely over the quarters, except for the second quarter in a considerable higher rate than usual. But on other the hand, the EBIT for the away-from-home channels declining by 58% annually, but the decline is slowing down over the quarters. And hopefully, we continue to see this slowing down trend in 2021 until the away-from-home channels are open totally, hopefully, in the second half of 2021. If we look at the net income results, in slide 52, we can see the annual net income, again, growing continuously over the past 4 years, organically growing by 9.2% this year. And also the net income rates growing from 6.4% last year to 6.6% this year. Needless to say, the same trend we see in the share per -- the profit per share rate. And the same trend we see in the fourth quarter, except for the fact that this quarter, the net income is declining by 4.2% organically due to the increase in finance expenses. The increase in finance expenses this quarter is mainly due to 2 major explanations. The first one is the early redemption of series D of our bonds, which was mainly in the first quarter. And the second explanation is the mark-to-market of the hedging contracts on purchasing in foreign currency that we do here in Israel. When we purchase raw materials, et cetera, in dollars, euros, British pound, we hedge some of these purchasing deals. And this quarter, we've seen mark-to-market of expenses on this deals than in the previous quarter last year, the fourth quarter of 2019, we've seen the income in this hedging deal. Last but not least, if we look at slide number 37, we can see our net-debt-to-EBITDA, our leverage going down from 1.6x at the end of last year to a bit less than 1.5 at the end of 2020. We have executed this year, a whole program of optimizing our debt portfolio and after executing these programs, we find ourselves in a very good financial position and flexibility, where our maturity -- average maturity on our debt grew from 3 years to 6 years and our average repayment, debt repayment for the next 3 years declined by more than ILS 150 million annually. And our interest rate on our debt portfolio declined from 3.6% to 3.1%, and we expect it to further decline next year to approximately 2.6%. As Giora said, this puts us in a very good financial position for future M&A and strategy implementation. I'll finish on this note, and we'll be happy to receive your questions.

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

Chris Reimer on for Tavy. Questions, first off, I know you guys don't provide guidance, so to speak. But I was wondering if you could talk about maybe the drivers on how you see across the segments, what are the drivers that you see in 2021, just across, broadly speaking?

Cross segments.

Cross segments. Thank you very much. I'll start, and Giora will complete if he has anything to add. So in Strauss Israel, the main, let's say, growth initiatives are continuing our innovations both organically, inorganically, entering new categories, as you've seen, we are building a new very substitute plant in Israel that will produce both Alpro's products that we started selling this year. And the other plant-based dairy products that we are planning to produce in our new factory. And many other exciting initiatives that we have in our innovation pipeline. If we look at the coffee company, we see you already see the tremendous growth momentum that we have in Brazil, both organically and inorganically. Organically, we are growing in volume in the coffee segment, we are going in the less so-called the premium coffee segment of capsules and capsules machines in Brazil. And we are going in the adjacent segments that we have in our to company JV in Brazil. And inorganically, as you've seen, we've bought 2 exciting companies this year. One is coffee Mitzui Coffee company that complements our portfolio in Brazil. And the other is the Santa Tan Catania plant-based dairy drinks which are -- both of them are very promising activities. And we will continue our strategy that is very consistent in the previous years of growing organically and inorganically in Brazil in the next few years. So this is the main growth or for the coffee companies. In Strauss Water as you've seen this year, we are -- in Israel, we are improving our position. We increased dramatically our installed base in Israel to over 700,000 machines in household. And we are growing -- we are improving our service credibility and capabilities we are improving our digital capabilities. And we have a very exciting innovation pipeline for Strauss Water here in Israel. In China, we are building -- we are going to complete to build our point-of-use factory in the second quarter of 2021. We believe that it will give us a great momentum also to increase our capacity and to improve our gross margins in Strauss Water China. And we started to enter a nice adjacent segments of the entry point-of-entry machines and the infrastructure, and this will complement our activity in China. And last but not least, Sabra and Obela, our main task is to increase our household in the binary in Sabra, we see, although the pandemic, the COVID caused us not insignificant travel this year, as you can see in Sabra's results, we see also a good potential for next year because the COVID allowed people to get used to new ways to consume hummus in the house, more around the table, more around the family meal in-house, and we see it as a good opportunity to grow. And we are also exploring inorganic opportunities in our salads and spread section. Giora?

Yes. Just a quick one. We are nowadays -- we are running a project together with McKinsey in order to really find and appoint better and more expansion potential expansion in Israel and out of Israel. And I should say, frankly, the more we deep dive together with McKinsey the more we understand that we are exactly on the right categories with the right channels. Yes, we have a lot -- still a lot of room to stretch to grow in area of coffee, water, dairy, fresh salad, fresh cools, fresh product snacking. And we feel that we have a lot of room to continue our growth by greenfield, by M&A. But we feel very comfortable that we are on the right trend, the right categories in order to grow the company during the next couple of years.

[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 for joining us, and thank you for your question and your partnership. And I hope we'll see you soon either in Israel or in your place. Please stay safe and healthy. Wish you all happy Easter and have Passover. So thank you, and have a great day.

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